Each year, the IRS adjusts the income tax brackets, as well as exemptions, deductions, and other tax thresholds, to account for the effects of inflation. The 2016 numbers have just been released; here's what's changing, and how it might affect your tax bill:
The tax bracket thresholds have increased slightlyFor 2016; the tax brackets have been adjusted slightly upward. The threshold for the top (39.6%) tax rate has increased by approximately 0.45% for both single and joint filers, and the thresholds for the other individual tax rates are adjusted upward accordingly.
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Here are the 2016 tax brackets, based on filing status, which you'll use when paying your 2016 taxes in early 2017. If you'd like to compare these with the 2015 tax rates, you can find them in this article.
Exemption and standard deduction amountsFor 2016, the personal exemption amount has risen to $4,050 from $4,000 in 2015. However, other than for taxpayers who file as head of household, the standard deduction amounts remain the same.
How the average American family could be affectedAccording to the latest Census Bureau data, the median household income in the U.S. was approximately $53,657 in 2014. Assuming that income increased at the same rate as the tax brackets, we can estimate that the median household income for 2015 and 2016 will be $54,507 and $54,752, respectively.
For a married couple with one child earning the median income, let's look at how this could affect their tax bill, assuming they choose the standard deduction, as opposed to itemizing.
So how much of an impact do the 2016 tax changes make on the average American family? About $9 -- because of low inflation, the year-over-year change really isn't much.
Other tax adjustments for 2016In addition to the tax brackets and exemption and deduction amounts, there were some other inflation-related tax changes that could potentially affect you:
- The maximum Earned Income Credit is $6,269, up from $6,242 in 2015.
- The AGI threshold for the Lifetime Learning Credit is up $1,000 to $111,000 for joint filers.
- The foreign income exclusion is up $500 to $101,300 for the 2016 tax year.
- The estate-tax exclusion amount for people who die in 2016 has increased to $5.45 million, up from $5.43 million in 2015.
The bottom lineInflation was subdued this year, so we didn't see a big change in most tax figures for 2016. As a result, the effect on most taxpayers should be small, provided their taxable income doesn't change drastically.
Finally, keep in mind that income-tax rates should theoretically move in tandem with wage growth, meaning that there should be no net effect of the changes, in terms of purchasing power. However, if you didn't get a raise this year, the changes to the tax brackets, exemption, and standard deduction amounts could help put a little extra money in your pocket in 2016.
The article The 2016 Tax Brackets and What They Mean to the Average American Family originally appeared on Fool.com.
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