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2016 Tax News
Dear Friends/Clients:

HAPPY NEW TAX YEAR . . . Greetings from our Torrance Office and we hope you have had a wonderful year and we are looking forward to seeing you at your upcoming tax appointment. This year, we are celebrating our 46 years Anniversary in the income tax business because it is folks like you who make being in business a pleasure. You have enabled us to grow. You have encouraged us to do a better job, and for this we are deeply grateful.


We are very excited that the income tax season has arrived and we are writing to say "Thank You" for placing your trust and confidence in us last year. We hope our service to you was as efficient and courteous as we continuously strive to make it. 

For 2016 returns, the IRS will wait until February 15, 2017 before issuing the Refund checks to Taxpayers who claim the Earned Income Credit and/or Refundable Child Credit to be able to detect any Tax Identity Theft and Refund Fraud. The IRS still expects to issue most refunds in less than 21 days.

The IRS URGES PUBLIC TO ANOTHER E-MAIL SCAM

The IRS continues to warn taxpayers to from Fraudsters sending fake CP-2000 Tax Bills via Electronic Mail. The language in the fake bill references taxes owed under the Obama Care Act. If you get one of these communications, DO NOT OPEN or download the attachment. Remember the IRS does not initiate contact with taxpayers through e-mail.

As requested by most of you, the following are highlights of Tax Law Changes that took effect in 2016 for you to read and share with your friends, neighbors and co-workers:

I. The Affordable Care Act (ACA):
For 2016, companies with Full-time or equivalent employees must use form 1095-C to report Insurance Data. The fine for going without insurance is higher than last year. The basic fine is $695 a person ($347.5 for each family member under 18 years old), with a ceiling of $2,085, (last year the penalty per person was $325 and per family was $975).

If you received a form 1095 from any issuer or agency, you must bring or mail all copies to us to be able to prepare your tax return. If you did not receive a 1095 form check with the marketplace or your employer so that we can help you avoid any penalties for failure to have health insurance. There is maximum penalty of 2.5% of your income (2% last year). Also, the income levels to qualify for the Health Premium Credit, available for those with household incomes between 100% and 400% of the federal poverty level, of $11,770 to $47,080 for single, and $24,250 to $97,000 for a family of four.

I. Tax Rate Structure:

The tax rates have remained the same with inflation adjusted amount as below:
1. 2016 Tax Rates for Federal:
The Seven-bracket rate schedule will be as follows:

 Tax Rate

Married Joint

Head of Household

Single

Married Separate

 10%

$0 - $18,550

$0 - $13,250

$0 - $9,275

$0 - $9,275

 15%

$18,551 - $75,300

$13,151 - $50,400

$9,226 - $37,650

$9,226 - $37,650

 25%

 $75,300 - $151,900

$50,401 - $130,150

$37,651- $91,150

$37,651 - $75,950

 28%

$151,901 - $231,450

$130,151 - $210,800

$91,151- $190,150

$75,951- $115,725

 33%

$231,451 - $413,350

$210,801- $413,350

$190,151 - $413,350

$115,726 - $206,675 

35%

$413,351-$464,850

$413,351-$441,000

$413,351-$441,000

$206,676-$233,475

 39.6%

 Over $466,950

Over $441,000

Over $441,000

Over $233,475

2. 2016 Tax Rates for California:
(a) For Individuals: The Maximum rate is 12.3%, the AMT rate for individual is 7% and Mental Health Services is still 1% of the taxable income of $1 million.
(b) For Corporations: Other than the Banks & Financial the rate is 8.84%, For Banks & Financial the rate is  10.84% and  For AMT Maximum rate is 6.65%.
(c) For S Corporation: the rate is 1.5% and For S Corporation Banks & Financial: the rate is 3.5%.

3. Estate & Gift Tax Rate remains at: 40% and $5,450,000 for 2016. This is a lifetime exemption. Gift tax annual exclusion stays at: $14,000 per donee and for non-citizen spouses $148,000. It should be noticed that the annual exclusion is available to all donors including Nonresident Citizens, and Taxable Gifts are taxed at the same rates that apply to U.S. Citizens. [IRS Code Sec. 2501(a)(1)]

4. The Top Rate on Capital Gains and Dividends, remain at: 20% for high-income taxpayer, (Singles with taxable income above $415,050, Heads of Household above $441,000 and Joint Filers above $466,950). Also, Medicare surtax can boost the rate to 23%. However, Taxpayers in the 10% and 15% Tax Bracket can still qualify for the special 0% rate is assets are held more than one year.

5. Standard Deduction:
(a) The standard deduction for taxpayers who do not itemize deductions in 2016 has increased a bit:

Federal State 
Married Filing Joint & Widow(er)  $12,600 $8,258 
Head of Household  $9,300  $8,258
Single  $6,300  $4,129
Married Filing Separate  $6,300  $4,129

 

(b) An additional standard deduction amount for elderly or blind (for married is $1,250 and for Single & Head of Household is $1,550).

(c) The basic standard deduction for the dependents is $1000, or $350 plus the dependent's earned income up to regular standard deduction of $6,300, whichever is greater.
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6. Itemized Deduction Limitation:
(a) 3% reduction for higher income taxpayer. If Adjusted Gross Income (AGI) exceeds the amount of $259,400 to for Single, $285,350 for Head for Household, $311,300 for Married Filing Jointly and $155,150 for Married Filing Separately. But total reduction can’t exceed 80% of Itemizations.   
(b) For California Taxpayers: the reduction amount is the lesser of 6% of the excess over the AGI or 80% of the amount of itemized deductions if the AGI exceeds $364,923 for married filing jointly, $182,459 for single & married 182,459 filing separately and $273,692 for head of household.


7. Personal Exemption:
(a)
The Personal Exemption Amount: The personal exemption increased in 2016 to $4,050. However, this will be phased out for higher incomes. It is decreased by 2% for each $2,500 of AGI over the threshold amount (see 5 above).
(b)The Kiddies Tax: the first $1,050 of unearned income of a dependent who does not work is Tax-Free. The next 1.050 is taxed at 10% and any unearned income above $2,100 is taxed at the parents' rate (see above).

(c) For California Taxpayers: The personal exemption increased for single, married filing separately or head of household taxpayers from $109 to $111, for married/RDP filing jointly or surviving spouses from $218 to $222. The dependent exemption credit increased from $337 to $344 per dependent.           

8. Earned Income Credit (EIC) :
(a) For Federal, in 2016 the amount of credit has increased. The maximum credit is $6,269 for taxpayers with three or more children and earned less than $47,955 ($53,505 if Married Filing Jointly); $5,572 for taxpayers with two children and earned less than $44,648 ($50,198 if Married Filing Jointly) and $3,373 with one child and earned less than $39,296 ($44,846 if Married Filing Jointly). The maximum credit for taxpayers without children is $506 and earned less than $14,880 ($20,430 if Married Filing Jointly). Taxpayers still get the credit even having investment income of $3,400 or less.
(b) For California, in 2016 the amount of credit has increased. The maximum credit is $2,706 for 3 or more children and maximum income of $14,161, $2,406 for 2 children with maximum income of $14,161, $1,452 for 1 child with maximum income of $10,087 and $217 for no children with maximum income of $6,717.

 9.  Non-refundable Renter's Credit: The credit is $60 for Single & Married/RDP Filing Separately with California AGI of $39,062 or less and $120 for Married/RDP Filing Jointly & Head of Household with a California AGI of $78,125 or less.

10. Qualified Senior Head of Household Credit: The credit is 2% of California taxable income. The new maximum credit is $1,345 with a California AGI of $71,370.

11. Joint Custody Head of Household & Dependent parent Credit: The credit is 30% of net tax with a maximum credit amount of $440.

12. Reporting Foreign Accounts: If you have Foreign Accounts or Trusts, you must report them on your return if they were over $10,000 at anytime during 2016. Foreign Bank Account Reporting (FBAR) Form (114) needs to be filed electronically. The due date will be April 15 instead of June 30 with an extension of 6 months. There are substantial penalties for failure to disclose these items. Also, U.S. Taxpayers holding specified financial assets with an aggregate value exceeding $50,000 will report those assets to the IRS on Form 8938 along with their tax.

13. Foreign Income Exclusion: For 2016, the exclusion amount is $101,300, and the maximum housing exclusion is 30% of the $101,300 less the base housing cost of 14% of the maximum foreign earned income exclusion ($14,182). It should be noticed that income in excess of the exclusion amount will be taxed at a higher regular tax.

14. Limited Liability Company (LLC): The 2016 LLC minimum fees of $800 and for Total Income remain unchanged, (none for $0-$249,999; $900 for $250,000-$499,999; $2,500 for $500,000-$999,999; $6,000 for $1,000,000-$4,999,999 and $11,700 for $5,000,000 or more).

III. Standard Mileage, Meal Rates and Per Diem:
(a) Standard Mileage: The standard mileage rate for business use of cars has been decreased to 54 cents per mile (53 1/2 in 2017). The standard mileage rate for charitable contributions remained 14 cents per mile and for medical reasons & determining moving expenses has decreased to 19 cents (17 cents in 2017) per mile.
(b) Qualified Transportation fringe Benefits: For 2016, an employee may exclude from taxable income up to $255 a month for qualified parking expenses.
(c) Meal & Entertainment and Per Diem deduction limits:
The amount allowable deduction for meal or entertainment expenses remained 50% or (80% for certain transport workers while away from home).  
For California residents, for meals, the per diem allowable is $57 to $68 per day depending on the city of destination and $109 to $282 for meals and lodging at the federal per diem rate. However, self-employed taxpayers must have actual receipts for lodging (Publication 1542). 
 (d) Meals and lodging provided with long-term care services: These expenses can be deducted as medical expenses if the person is in the facility for medical reasons only (patients who can't do two or more daily living activities).
(e) Simplified per diem rates: In high cost locations, employees can get free of tax, up to $282 per day and in other areas it is $189. No change to the rates for meals, stay at $68 per day in high-cost area and $57 in other locations.


IV. Other Tax changes to be effective in 2016:
1. Social Security (FICA) and Medicare Tax:
(a) For 2016, the Social Security Tax remains at $ 118,500 with Maximum Social Security Tax of $7,347, for self-Employed $14,694 and the Medicare tax is No limit.
(b) Earned income ceilings for social security benefits for prior to normal retirement age (65 plus 10 months) is $15,720 ($1 in benefits will be deducted for each $2 you earn above the $15,720).
(c) In the year you reach full retirement age, your benefits will be reduced $1 for every $3 you earn above $41,880.
(d) Optional methods for computing self-employment earnings are $5,040 (Earnings required for one quarter is $1,260).
(e) Self-Employment Tax rate is imposed on net earnings. The rate is 15.3%, (12.4% component for Social Security and 2.9% component for Medicare hospital insurance), but the .0.9% Medicare Surtax Kicks in for Singles, with wages exceed $200,000; for Married filing Jointly Earning above $250,000 and for Married Filing Separately above $125,000.  
(f) The “Nanny Tax Rules, require taxpayer to withhold Social Security and Medicare Taxes for any Household employee that earns $2,000 annually. These rules apply to baby sitters, house cleaners, yard workers, care givers and general labor that are not incorporated.   
(g) Medicare Part “B” and Part “D” Premiums per month are based upon the Modified Adjusted Gross Income (MAGI). The law requires Upper-Income seniors to pay higher premium for their Medicare Part B and Prescription Drug Coverage (Part D) as follows:

IF YOU FILED AS

WITH MAGI OF

  PART “B”

  PART “D”

Single, Head of

$ 85,000 - $107,000

$   53.50

$ 13.30

Household or

$107,001 - $160,000

$133.00

$ 24.20

Qualifying Widow (er)

$160,001 - $214,000

$ 214.30

$ 55.20

 

More than  $214,000

$ 294.00

$ 76.20

Married filing Jointly

$170,000 - $214,000

$   53.50

$ 13.30

$134 +

$214,001 - $320,000

$ 133.90

$ 34.20

 

$320,001 - $428,000

$ 214.30

$ 55.20

 

More than $428,000

$ 294.60

$ 76.20

Married filing

$ 85,000 - $129,000

$ 214.30

$ 55.20

Separately (Living Apart)

More than $129,000

$ 294.60

$ 76.20

There is an increase of 3% in the cost of living during the taxable year of 2017 based on the Consumer Price Index (CPI) published by the Department of Labor.

2. Kiddies Tax and Credit Rules:
(a) Dependent children under Age 19 (Age 24 if a Full-Time Student) having over $2,100 in 2016 in unearned income will pay income tax based on parent’s top Marginal Tax Rate (Form 8615 needs to be filed).
(b) Children under 17 years old having over $1,000 in 2016 in unearned income will pay income tax based on the parent's top marginal tax rate (Form 8615 needs to be filed).
(c) Taxpayers who have qualifying children under 17 years old are entitled to claim a credit in the amount of $1,000 for each child subject to the AGI limitations.   
(d) Parents could elect to include child's income in their return; if the unearned income was less than $10,500 for 2016 (Form 8814 needs to be filed).

3. Higher Qualified Education Expenses:
(a) For the American Opportunity Credit (Hope Credit), the credit has remained the same $2,500 a year for each eligible student (100% of $2,000 plus 25% of the next $2,000). The phase-out of the credit begins at AGI in excess of $80,000 - 90,000 ($160,000 - 180,000 for joint filers). 40% of the credit ($2,500) is refundable up to $1,000, even if you owe no taxes.
(b) For Life-time learning, the credit has remained the same, at $2,000 per family (20% of $10,000 of qualified tuition and related expenses paid), subject to the limitations of the AGI of $55,000 to $65,000 ($111,000 to $131,000 for Joint Filers).
(c) For Qualified Higher Education Expenses Deduction, it is above line tax deduction with a maximum of $4,000, subject to the limitations of the AGI of $65,000 to $80,000 ($130,000 to $160,000 for joint filers).
(d) Saving Bond interest exclusion for higher education, the interest on U.S Saving bonds redeemed to pay qualified higher education expenses may be Tax-Free, the phase-out limitation of the AGI begins at $77,550-$92,550 ($116,300-$146,300 for joint filers), (Form 8815 need to be filed).     
(e) Student Loan Interest Deduction has remained the same at $2,500 with phase-out of $65,000-$80,000 for single & head of household ($130,000-$160,000 for Joint filers) and no deduction is allowed for Married filing Separate.

4. Adoption Credit and Assistance Program:
The credit and exclusion for adoption of child with special needs have been increased to $13,460. The phase-out amount begins when the AGI between $201,920 - $241,920 and the credit will no longer be refundable as last year.

5. Long-Term Care Insurance Premium Limits:
For 2016,Taxpayers may deduct annual premiums of up to $390 if they are age 40 or younger; $730 for age more than 41 to 50; $1,460 for age more than 51 to 60; $3,900 for age more than 61 to 70; and $4,870 if over age 70.   Also, the limit for tax free payout under such policies increased to $330 a day and $120, 450 per year.

6. The IRA contributions and Pension Plan Limitation:
(a) The maximum annual contribution limit for IRAs has remained the same at $5,500 ($6,500 for individuals who have reached age 50 by 12/31/16).The phase-out for joint filers is between $98,000 and $118,000, for Single & Head of Household is between $61,000 and $71,000, and for Married filing separately is between $0 and $10,000.
However, taxpayers still will be able to take an IRA  deduction even they covered by a retirement plan at work as long as the MAGI is less than $68,000 for single ($112,000 for married filing jointly or qualifying window(er).
(b) For an IRA contributor who is not covered by a work place retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $184,000 and $194,000.
(c) Taxpayers may make non-deductible contributions to Roth IRA, subject to IRA contributions limitation. The maximum annual contribution that can be made to a Roth IRA is phased-out for taxpayers with MAGI between $184,000 and $194,000 for Filing Jointly, between $117,000 and $132,000 for Single & Head of Household Filers and between $0 and $10,000 for Married Filing Separately.
(d) For 2016, an individual is allowed a maximum annual deductible of Health Plan contribution (HSA) of $3,350 for single coverage and $6,750 for family coverage. HSA owners who reach age 55 by 12/31/16 can increase their annual contribution by $1,000.
(e) For the Define Contribution Pension Plan and Simplified Employee Pensions (SEPs) they have remain the same with a maximum of $53,000 for each employee. The maximum earning for Contribution Calculation is $265,000.
(f) For Simple Plans, the amount has been increased to $12,500 and $15,500 ($2,500 more) for those aged 50 or over by 12/31/16.      
(g) For the Defined Benefit Pension Plan, the Maximum Annual Retirement Benefit remains the same at $210,000; and the annual compensation limit is increased to $265,000.
(h) For 401(k), 403(b) & 457(e) Contribution has remained the same at $18,000 and $24,000 for those aged 50 and older by 12/31/16 (for Simple Plans the Catch-up Contribution is $3,000).
(i) Retirement Savings Contribution Credit: The saver's credit helps offset part of the first $2,000 workers voluntarily contributing to IRA's and to 401K. The maximum saver's credit is $1,000 for single and $2,000 for married couples, subject to the AGI limitation, up to $61,500 for Married Filing Jointly, up to $30,750 for Single and $45,750 for Head of Household (Form 8880 needs to be filed).

7. New Tax Filing Deadlines:
(a) The deadline of filing C Corporations will be April 18 instead of March 15 (the 4th month after the closing of the calendar year and for fiscal year corporation the deadline will remain the 15th day of the 3rd month after the close of fiscal year with an extension of 5 months (September 15).
(b) The deadline of filing the partnership will be March 15 instead of April 18 with an extension of 6 months.
(c) The deadline for filing FBAR (Form114) is April 18 instead of June 30 with a new Extension of 6 months. The penalty for not filing Form 114 is the greater of $10,000 or 50% of each account balance for each year.
(d)The due date for filing Form 990 is still May 15 with a new 6 month extension until November 15 (instead of 2 extensions August 15 & November 15).
(e)The deadline for filing Form 550 (for Employee Benefit Plan) is still July 31 with a new extension of November 15 instead of October 15.
(f)The deadline of filing Form 1041 & 706 (Trust & Estates) remains the same on April 15 with a new extension until September 30 instead of September 15.

8. Alternative Minimum Tax (AMT) and Exemption Amount:
For 2015, the AMT Federal exemption for Married Filing Jointly is $83,400 (Phase-out starts at $158,900); for Single & Head of Household it is $53,600 (Phase-out starts at $119,200), for Married  Filing Separate it is $41,700 and  (Phase-out starts at $79,450 to $246,250 ).  The rate is 26% on the first $185,400 and then the 28% AMT tax bracket kicks above $185,400 of Alternative Minimum taxable income.

9. U.S. Citizen Living Abroad: Taxpayers who move out of the United States of America will continue to be required to file Income Tax. The IRS Taxes its citizens on their worldwide income. They also require you to report Foreign Bank Accounts (FBAR).

10. Reporting Foreign Accounts: If you have Foreign Accounts or Trusts, you must report them on your return if they were over $10,000 at anytime during 2016. Foreign Bank Account Reporting (FBAR) Form (114) needs to be filed electronically. The due date will be April 15 instead of June 30 with an extension of 6 months. There are substantial penalties for failure to
disclose these items. Also, U.S. Taxpayers holding specified financial assets with an aggregate value exceeding $50,000 will report those assets to the IRS on Form 8938 along with their tax.

11. Foreign Income Exclusion: For 2016, the exclusion amount is $101,300, and the maximum housing exclusion is 30% of the $101,300 less the base housing cost of 14% of the maximum foreign earned income exclusion ($14,182). It should be noticed that income in excess of the exclusion amount will be taxed at a higher regular tax.

This year, the filing deadline to submit 2016 tax return is Tuesday, April 18, 2017 rather than the April 15 date, because of the weekend and the Emancipation day holiday in Washington D.C.

For an appointment or further information, please call us at: (310) 326-6888 and pass out my business card, recommend us to your friends, or better yet, bring one with you (just let us know in advance). A friendly smile and a cup of coffee await you.
Also, you can e-mail us at: abits@aol.com or visit us at: www.abits.org.

 Sincerely,

Dr. Ahmed M. Abdelnaby, EA., ATA, MS.,JD.

Doctor of Jurisprudence

Master of Science Degree in Taxation

Enrolled to practice before the IRS

IRS Certified Acceptance Agent

America's Tax Expert

 

TaxNews-2016



 

 

 

 

TaxNews-2014