It’s already December. Before long, it will be 2017, but we’ll all still accidentally write 2016. The start of a new year often brings tax changes, and with a new President in 2017, it is likely that there will be even more changes than usual. This article covers 2016 year-end update for individuals. What can we expect for next year?
Actually, most of the tax changes set for 2017 relate to businesses, and there aren’t that many for individuals. Most of the changes from 2016 simply relate either to amounts that have been indexed for inflation, or to tax benefits that are set to expire in 2016. We’ll cover some of the changes that may impact you for 2017 and beyond.
Due Date Changes
There have been a number of due date changes, but most of these apply to entities rather than individuals. Calendar year-end partnerships and S-corporation returns are now due on March 15th, so you may receive K-1s from these entities before the 1040 deadline. The earlier due date might only result in your earlier receipt of a tentative K-1, with a final K-1 sent to you later in the year if the entity extends the tax return.
Individual tax returns are still due on April 15th, unless that day falls on a weekend or a legal holiday. For 2017, April 15th falls on a Saturday, and Monday, April 17th is Emancipation Day in Washington, D.C. Consequently, the 2016 individual tax return due date is Tuesday, April 18th.
If you have any ownership of or signing authority in a foreign bank account(s) or other foreign financial accounts, you may be required to file the Foreign Bank Account Reporting (FBAR) Form Fin Cen 114. The due date for this form has changed from June 30th to April 15th. Unlike the 1040 due date, the due date for this form does not change, even if it falls on a weekend or holiday. There is a 6-month extension available in certain cases, but you should plan to inform us of any foreign bank holdings as soon as possible to ensure that you are not subject to the delinquent filing penalty.
If Congress does not act in the next few weeks to pass an extender bill, a number of tax breaks will not be available in 2017. Notable among these are the deduction of mortgage insurance premiums as part of mortgage interest deductions and the mortgage loan forgiveness exclusion. Currently mortgage insurance premiums (paid when a home is purchased with a down payment of less than 20%) may be included with mortgage interest deductions if a taxpayer takes itemized deductions. This tax break is eliminated for taxpayers whose adjusted gross income exceeds $109,000 (married filing jointly). If this break is not extended, only actual mortgage interest paid will be allowed to be deducted on your tax return.
While forgiveness of debt is generally includable in income, through the end of 2016 there is an exclusion for taxpayers who meet certain criteria to exclude forgiveness of a mortgage loan from their income. This tax break is not permanent, so if Congress does not extend it for 2017 this exclusion will no longer be available. Consequently, taxpayers will need to include forgiveness of a mortgage in their calculation of income.
Deductibility of Medical Expenses
If you are over 65 and have significant medical expenses that you generally deduct on your tax return, you should be aware that the floor for these deductions will increase in 2017. On your 2016 tax return you could deduct medical expenses in excess of 7.5% of your AGI, but on your 2017 return you will only be able to deduct the expenses that are in excess of 10% of your AGI. Note that individuals under 65 were already subject to the 10% floor.
New Amounts for 2017
The rates for each tax bracket remain the same (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) for now, but the taxable income for each bracket has been indexed. The 2017 bracket for married filing joint is:
|Tax Rate||Income Bracket||Tax|
|10%||$0 – $18,650||10% of taxable income|
|15%||$18,651 – $75,900||$1,865 + (15% of income over $18,650)|
|25%||$75,901 – $153,100||$10,452.50 + (25% of income over $75,900)|
|28%||$153,101 – $233,350||$29,752.50 + (28% of income over $153,100)|
|33%||$233,351 – $416,700||$52,222.50 + (33% of income over $233,350)|
|35%||$416,701 – $470,700||$112,728 + (35% of income over $416,700)|
|39.6%||Above $470,701||$131,628 + (39.6% of income over $470,000)|
Standard deductions increase slightly for 2017, but the personal exemption amount remains the same as 2016.
One big jump is with respect to the social security wage base. For 2015 and 2016, the maximum wage base on which your social security taxes were based capped out at $118,500. Any wages above this cap were not subject to social security taxes. For 2017, however, this cap jumps to $127,500, and all wages up to that cap are subject to social security taxes.
President-elect Trump has a number of tax proposals that would significantly impact individual taxes. Although there is a Republican majority in Congress, there is not a supermajority. Consequently, we could see an adjusted version of these proposals come through Congress, or we may not see these changes made at all. Some of the proposed changes that Trump has discussed include:
- Repealing the alternative minimum tax (AMT). Trump has proposed completely repealing the AMT, while under the Republican party’s plan the AMT would be eliminated, except for the 90% limit on net operating losses. This would have a positive impact on the many taxpayers who are currently subject to the AMT.
- Reducing tax rates and restructuring brackets into three categories. Under this proposal, the top tax rate would be 33%. This would likely have the largest impact on those individuals taxed under the highest rates.
- Increasing the standard deduction while eliminating exemptions. This would likely have the largest impact on taxpayers with children – the more children a taxpayer claims on his or her return, the greater the impact this change would have.
- Eliminating most itemized deductions. Trump has stated that his plan would eliminate all itemized deductions except for the mortgage interest and charitable deductions.
- Repealing the estate tax. Wealthy taxpayers would no longer need to set up trusts and engage in tax planning in the same way if the estate tax were repealed.
Tax planning strategies would vary greatly depending on whether these proposals were enacted. Unfortunately, the general tax wisdom of “defer income, accelerate deductions” is turned upside down if tax rates decrease, AMT disappears, and itemized deductions are reduced. Given the uncertainty surrounding tax policies that may be enacted, it is difficult to determine the best course of action. If you’d like to discuss your options for tax planning strategies with us, please don’t hesitate to give us a call.