IRS Announces Significant Tax Exclusion Threshold Changes for 2016

The IRS recently announced that there will be a number of changes upcoming for 2016 with inflation adjustments. According to a Forbes report, these changes most notably include the inflation adjusted unified credit against the lifetime gift and estate tax, which will bump the threshold up from $5.43 million this year to $5.45 million in 2016. Oppositely, the annual gift tax exclusion threshold will stay at $14,000.

The federal estate and gift tax exemptions rise with inflation

For 2016, the lifetime gift and estate tax exemption will increase to $5.45 million per individual and $10.9 million per married couple, according to the Journal of Accountancy. This increase is significant to high net worth taxpayers as they are more likely to reduce the size of their estate trusts and gifts to maintain them below the tax threshold.

It is important for taxpayers to follow rate hikes because the gift and estate tax threshold is indexed directly for inflation. For instance, since 2001, the gift and estate tax thresholds have increased from $675,000 to $1 million in 2003, and on to $2 million in 2008 before jumping up past the $5 million mark in 2011.

Annual gift exemption

The annual gift tax exclusion amount will remain at $14,000 for 2016, maintaining the same rate threshold for the third consecutive year. What this means for high net worth individuals is that they are allowed to send individual $14,000 gifts to as many people as they want. In turn, the threshold increases to $28,000 for married couples. Further, the annual exclusion for the gift tax does not apply to the lifetime gift threshold.

Other 2016 inflation adjustments and tax tables

The IRS also announced several other tax changes that were adjusted for inflation. These changes included the personal exemption, which is set to increase from $4,000 this year to $4,050 in 2016. Although, the standard deduction for 2016 increases for heads of households to $9,300, up from $9,250 this year. Likewise for the adoption credit under Section 23, as this limit adjusted for inflation to $13,460 in 2016, up from $13,400 in 2015.

Other major changes for 2016 include that the tax threshold for married couples filing joint returns at the highest income tax level of 39.6 percent will see that number increase from $464,850 this year to $466,950 next year. The heads of households at the highest tax bracket of 39.6 percent will also see their income tax level rise from $439,000 in 2015 to $441,000 next year.

The Earned Income Credit for taxpayers filing jointly with three or more qualifying children will move up to $6,269 this year from $6,242 in 2015. Further, the limitation for itemized deductions to be claimed in 2016 will apply to taxpayers with incomes at $259,400 and up, and $311,300 for married couples with filing joint tax returns.

The final increase will be the foreign earned income exclusion, which jumps from $100,800 this year to $101,300 next year.

It is also important to note that the standard deduction for married taxpayers filing joint returns will remain at $12,600 and the standard deduction for single taxpayers and married taxpayers filing separately will also hold at $6,300.

Some penalties have increased

The procedure will now have amounts that are adjusted for inflation for various failure-to-file penalties. This is a significant development because the penalties applied to inflation adjusted amounts will be enacted for the first time as part of the Tax Increase Prevention Act of 2014. For instance, if a taxpayer fails to submit accurate payee statements, the inflation adjusted penalty amount under Section 6722 will not increase from $250 to $260.