New Year Changes

Here is how things stack up for 2016 and beyond:

The following tax law provisions (previously extended from year to year) are now permanent — the undergraduate education American Opportunity tax credit for up to $2,500 each year for four years, the educator expense deduction of $250 for teachers, the ability to use sales taxes as an itemized deduction instead of state income taxes, a charitable contribution from an IRA (Individual Retirement Account) is nontaxable, the depreciation recovery period is 15 years for qualified leasehold improvements, restaurant buildings and improvement, and retail buildings, and improvements and the overall dollar limitation on Section 179 tangible personal property is $500,000 subject to business income requirements. Section 179 allows an immediate tax deduction for equipment used in business.

Also, to fund health care expansion, medical costs must exceed 10% of adjusted gross income (“AGI”) rather than 7.5% to become an itemized deduction. The overall limit on flexible spending accounts is $2,500.

The social security portion of FICA payroll tax is 6.2% in 2016. The medicare portion of FICA payroll tax is 2.35% (vs 1.45%) if your salary is in excess of $250,000 for married taxpayers, and in excess for $200,000 for unmarried taxpayers.

The long term capital gains tax rate (currently 15%) for those taxpayers in the 25% and higher tax brackets is 20% if your income exceeds $400,000 ($450,000 for married joint filers).

Itemized deductions. Due to the return of the so-called “Pease amendment,” most itemized deductions were scheduled to be reduced by 3 percent of the amount of adjusted gross income (AGI) above a specified threshold. The law establishes higher thresholds of $250,000 for single filers and $300,000 for joint filers. Note that the overall reduction in itemized deductions can’t exceed 80 percent. Also, this reduction rule doesn’t apply to deductions for medical expenses, investment interest expenses, wagering losses, and casualty and theft losses.

Provisions extended through year 2016. The new tax law provides a one year extension for the discharge of debt on a principal residence income exclusion, the mortgage insurance premium deduction, and the above the line deduction for tuition and fees paid by a taxpayer, spouse, or dependents and claimed as an adjustment to income. Bonus depreciation has new life and extends until year 2019..