5 Important Tax Changes for 2016
What comes with a new year? Changes to the federal tax code, of course. And 2016 is no exception.
These changes could mean big financial penalties if you don't have health insurance. Or they could bring you big savings if you happen to own a small business. Overall, the changes to the tax code that Congress enacted last year are beneficial to consumers, according to Dave Du, vice president of consumer advocacy at TaxAudit.com.
"With just days to go before the end of the year, Congress finally extended most of the tax breaks which were set to expire," Du said. "Some of these provisions — like the definition of racehorse as property — won't impact too many of us, but there's much good news for taxpayers this year."
One example? You can file later this year. The deadline for filing your income taxes this year is April 18 instead of April 15, thanks to something called Emancipation Day in Washington, D.C.
Here are five other big tax changes you should be prepared for this year.
1. A Climbing Health Insurance Penalty
One of the bigger changes to the tax code this year is actually a punitive one: An increase in the penalty for not having health insurance that meets the requirements of the Affordable Care Act.
Micah Fraim, a Roanoke, Virginia-based Certified Public Accountant, said that for the 2015 tax year — those are the taxes you'll be filing by April 18 — filers will have to pay a penalty of $325 for every uninsured adult and $162.50 for every uninsured dependent child, or 2% of your taxable income — whichever number is greater.
That's a significant increase. For the 2014 tax year, those numbers stood at $95 and $47.50, or 1% of your taxable income. "And in 2016, it gets even worse," Friedman said.
For the 2016 tax year — the taxes you will file by April of 2017 — the penalty for not having insurance rises to $695 per adult and $347.50 per child, or 2.5% of your income. The message is clear: If you don't have acceptable health insurance, it's time to get it. (See also: Avoid These 5 Costly Health Insurance Mistakes)
2. New Health Insurance Forms
You can also expect to receive a new form or two in the mail relating to health insurance. If you've purchased health insurance through the federal government's Health Insurance Marketplace, you'll receive Form 1095-A. This isn't a change — the government began mailing this form out for the 2014 tax year.
But there are two new health insurance forms for the 2015 tax year. Form 1095-B is a statement from your health insurance company verifying that you and other members of your household have insurance coverage that meets the requirements of the Affordable Care Act. This form is only sent to taxpayers who get their insurance from somewhere other than the Health Insurance Marketplace, such as from their employer. Form 1095-C is a statement from your employer that provides details about your employer-sponsored health benefits.
Many taxpayers will receive both 1095-B and 1095-C, of course. The key fact to realize? You probably won't have to do anything with these forms, said Andrew Oswalt, Certified Public Account for Cedar Rapids, Iowa-based TaxACT.
"The new forms could be confusing because most people will think they have to do something with them," Oswalt said. "The reality is, they'll simply need to mark a checkbox on their Form 1040 when filing and keep the forms 1095-B and 1095-C for their records."
3. A Tax Break for Small Business Owners
Priyanka Prakash, finance specialist at loan-search service FitBiz Loans, said that small business owners need to be aware of Section 179 of the tax code — a new tax law that lets them deduct up to $500,000 of qualifying equipment on their tax returns.
To qualify for this deduction, the equipment must be used primarily for business purposes, Prakash said. The equipment must also have been put into use during the 2015 calendar year.
"This covers a wide range of equipment, from computers to furniture to business vehicles," Prakash said.
Prakash gives this example: If a business purchases office equipment worth $100,000, it can then deduct that entire purchase amount on its taxes. If the business has a tax rate of 30%, Section 179 will save it $30,000 in taxes. Previously, business owners could only deduct a small amount every year based on the life of the equipment.
"Section 179 saves small businesses a lot of money," Prakash said.
4. A Break for College Students
Tom Wheelwright, a Certified Public Account and author of Tax-Free Wealth, said that the 2015 tax year brought an important break for college students who are filing their own taxes or parents who claim these students as dependents.
Congress made permanent the American Opportunity Tax Credit, which gives college students a credit of $2,500 per year for college tuition, fees, and course materials. Parents can claim the exemption for their college-age students as long as they claim these students as dependents on their income taxes.
5. A Boon for Heads of Household
The standard deduction is set to rise — a bit — for heads of households. The standard deductions that most taxpayers can claim in 2016 haven't risen for single taxpayers or married couples filing jointly or separately. Blame that on low inflation.
But the standard deduction for taxpayers filing as the head of their households is going up a bit, rising $50 for 2016. That brings that standard deduction up to $9,300 in 2016.
Are you ready for tax time this year?
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