Taxes are one of the few certainties in life, but the challenge we all face is that tax laws change all the time. Keeping up to date on things like tax rates is important, especially as tax season nears once again. There weren't any major changes to tax rates in 2016, with only minor differences from the previous year's rate structure. Below, we'll look more closely at what happened to tax rates in 2016 and how the changes will affect your financial planning for the upcoming tax season.
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One more year of the same tax rates
It's been several years since there were substantial changes to tax rates. In 2013, the 39.6% tax bracket was added, making it the newest (and highest) marginal income tax rate. Since then, the same seven tax brackets have been in effect, with the lowest imposing a 10% tax rate. As taxpayers' income rises, their tax rates rise progressively to 15%, 25%, 28%, 33%, and 35% before reaching the top rate of 39.6%.
The preferential tax rates for qualified dividends and long-term capital gains also stayed the same in 2016. For those in the 10% and 15% regular tax brackets, the tax rate for dividends and capital gains is 0%. A 20% maximum rate applies to those in the top 39.6% regular tax bracket, and everyone else pays the intermediate rate of 15% on long-term capital gains and qualified dividends.
As we see every year, the income ranges for each tax bracket changed slightly in 2016. You can see the 2016 tax brackets here, and they include minor adjustments for inflation, which slightly decreased the amount of tax you'd have to pay on the same amount of income.
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For instance, in 2016, if you're married and file jointly, then the 15% tax bracket applies to income between $18,550 and $75,300. In 2015, the 15% marginal income tax rate applied to income between $18,450 and $74,900. The difference of $100 at the lower end of the bracket means that in 2016, an additional $100 will qualify for the next-lower tax bracket of 10%, saving you 5% of $100, or $5 in tax. Similarly, at the high end of the bracket, $400 more gets taxed at 15% rather than 25%, saving you 10% of $400, or $40, if you make that much in taxable income.
Very slight increases in exemptions and (some) standard deductions
Most years, inflation also results in increases in the standard deduction and personal exemption. For 2016, however, not all of these figures went up. Standard deductions only rose for those filing under the head of household status, rising by $50 to $9,300. All other filing statuses get the same standard deduction.
The tax benefit for personal deductions also climbed by $50 to $4,050. Though minimal, these increases produce at least incremental tax savings for many taxpayers.
One thing that didn't change was that two additional surtaxes can still boost the tax bills of high-income taxpayers. The net investment income tax applies to single filers with adjusted gross income above $200,000 and to joint filers earning more than $250,000. The 3.8% surtax applies to investment income such as interest, dividends, royalties, and capital gains, boosting margin rates by that amount. Meanwhile, the additional Medicare tax on earned income above those same threshold amounts imposes a surtax at a 0.9% rate on income from wages, salaries, and self-employment income.
The $200,000 and $250,000 thresholds are fixed, not changing with inflation. That means the tax is likely to capture an increasing number of taxpayers over time as inflation lifts wages across the board.
A 2016 boost for Obamacare taxes
2016 was the final year of tax rate increases for the Affordable Care Act's tax penalties for failing to have minimum essential healthcare coverage. In 2016, the rate rose from $325 per adult to $695, with a similar boost in the child rate and an increase in the family maximum from $975 to $2,085.
Also, a higher penalty applies if your income is above a certain level. The penalty is a percentage of your income above the threshold that requires you to file a tax return. In 2016, the penalty rose by 0.5% to 2.5% of income above the threshold.
Taxpayers are looking forward to 2017, because a new administration in the White House could finally bring reductions in tax rates. For now, though, the tax rates for 2016 still reflect the current administration's policies, and taxpayers will largely see similar things to what they dealt with last year.
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