Albert Einstein famously said, “The hardest thing in the world to understand is income taxes”, a sentiment with which I’m sure you’ll agree. Now that tax season is here again, like millions of others, you are probably scratching your head and wondering when doing a tax return will ever become less of a headache.
This year, as usual, there have been some changes. If you’re filing returns for 2016 you should take note that some tax benefits have increased due to inflation adjustments.
For starters, if you’re filing as head of household, your standard deduction has gone up by $50 from tax year 2015 to $9,300 for tax year 2016. For the other filing statuses, the standard deductions remain as they were for tax year 2015: $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly. The standard deduction reduces the amount of your adjusted gross income (AGI) that will be taxed, i.e., AGI – Standard Deduction = Taxable Income.
The amount for both personal and dependent exemptions has increased as well, going up to $4,050 for tax year 2016. If your income is over a certain limit, the amount you can take as an exemption will decrease, however. There is a phase-out of exemptions, which begin when your AGI reaches $259,400 if filing singly ($311,300 for married couples filing jointly). And if your income exceeds $381,900 ($433,800 for married couples filing jointly), no exemptions can be taken. Exemptions also reduce the amount of your adjusted gross income (AGI) that will be taxed, i.e., AGI – Standard Deduction – Exemptions = Taxable Income. See Table for the Personal Exemption Phaseout (PEP) Thresholds.
The Phaseout of Personal Exemptions are designed to limit the benefit of those exemptions to higher-income individuals. Congress has played an ‘on and off’ game with them. First enacted in 1991, they disappeared in the mid-2,000s but were re-enacted by the American Taxpayer Relief Act of 2012. Since tax year 2013, they have been in effect.