2016 Tax Rules: What Clients Need to Know

Jackie Bedard
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New year, new tax rules. Some of our clients might be just as confused as the "experts" or the political candidates being interviewed on TV about what these rules really mean. 

Here are the highlights of 2016's tax law changes in a recent article. Some things have changed, some were made permanent, and some are staying the same.

Marketing Opportunity

Having an informative conversation about changes in the nation's tax laws is an opportunity for us as lawyers and advisors to reconnect with clients we have not seen in a while and a chance to do a temperature check on possible changes to their planning needs. 

As a bare minimum effort, advisors could include these updates in their next client newsletter. That alone could make your phone ring with a client on the other end with questions about how these changes can affect his/her long-term financial plans. 

Some advisors may go a step further by recording a short presentation (usually no more than 5 minutes) on some of the tax changes. They can email a link to watch the video to clients and post it on their business' blog and social media pages.

What's New? What's Not?

Here are the most significant updates and extensions for 2016:

•    Congress extended several provisions, including the IRA charitable transfer provision for those 70½ and older, the child tax credit, and the ability of taxpayers to deduct state sales taxes instead of income tax on a federal return. 

•    The federal estate tax exemption is now $5.45 million per individual, up slightly from last year. The shared exemption for married couples is now nearly $11 million.

•    The annual gift tax exclusion of $14,000 per individual has not changed from last year. Married couples can still transfer up to $28,000 to a recipient.

•    The Affordable Care Act penalty tax is rising sharply. Taxpayers without ACA-approved insurance can be charged either a flat assessment or a percentage of income, whichever is higher. The flat assessment is now $695 per individual, up from $325 last year. The percentage-of-income penalty rises to 2.5 percent of income, up from 2 percent previously, with a projected cap of about $13,400 per household. To avoid the penalty, clients must either be covered under an approved plan or obtain one within the first two months of 2016. Some taxpayers are not subject to this penalty, including those belonging to certain religious groups and persons covered by Medicare or Medicaid (Medi-Cal in California).

•    Income tax brackets were reset for 2016 due to inflation. The top rate of 39.6 percent is triggered at $466,950 in taxable income for married couples filing jointly and at $415,050 for single filers. Clients should be aware of their top bracket because it allows them to estimate the value of a deduction. For example, a $100 write-off could save as much as $28 if your client is in the 28 percent bracket, which begins at $91,151.

•    If clients drive personal vehicles for work purposes, they might be enjoying the nation's lower gas prices this year; however, this drop means lower mileage deductions. In 2016, the business rate is 54 cents per mile, down from 57.5 cents last year.

Three Day Extension

If these updates don't exactly thrill you, here's something that might. This year, Tax Day - April 15th - falls on a Friday. This means the deadline is extended to April 18th, so clients get three more days to get their returns filed or to the post office.

Keep in mind some proposed tax changes are still making their way through Capitol Hill. And so, we encourage advisors to watch out for potential future updates that could be important to clients and their planning needs.

To learn more about common estate planning issues, check out our free guide, Estate Planning Pitfalls: The 12 Most Common Threats to Your Estate & Your Family's Future, or to discuss your estate planning concerns, please call our office at 919-443-3035 or use our contact form.