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Inflation was extremely low in 2015, and as a result, it wasn't necessary to adjust the tax brackets and other tax items by much for 2016. However, some slight adjustments were made, and there is one big tax change in particular you need to know about.
2016 tax brackets have changed slightlyDue to a lack of inflation, the 2016 tax brackets haven't changed tremendously from 2015. However, they have been adjusted slightly upward -- by about 0.5%.
In addition, the personal exemption amount has been increased by $50 to $4,050. As far as standard deduction amounts are concerned -- the deductions used by taxpayers who choose not to itemize -- all but one remains the same as last year.
The slight increases in the tax brackets and exemptions should result in the average family's tax liability falling by a few dollars. However, keep in mind that the idea behind increasing the tax brackets annually is to compensate for inflation, which (theoretically) translates to higher wages. So, the increases should produce no net effect in tax liability for a family whose income has risen at the same rate as the tax brackets, deductions, and exemptions.
One major change you need to know aboutBy far the biggest 2016 tax change is the Affordable Care Act penalty for not maintaining adequate health coverage throughout the year. As you can see from the chart below, the increase for 2016 is quite high.
Now, this may seem confusing, so if you're curious about how much your penalty could be, the website taxpolicycenter.org has a calculator that can help you estimate yours. You can also view a list of exemptions here.
Other notable 2016 tax changesThere are a few other tax changes for 2016, and all of these are small inflationary adjustments, just as we saw with the tax brackets.
- Families can now contribute up to $6,750 to a health savings account (HSA), an increase of $100 over 2015. However, the individual contribution limit of $3,350 remains the same.
- The maximum earned income tax credit (EITC) has increased slightly for 2016.
- The alternative minimum tax (AMT) exemption has risen to $53,900 and $83,800 for single and joint filers, respectively. This represents an increase of $300 (single) and $500 (joint) from 2015.
- The lifetime estate tax exemption rises by $20,000 to $5.45 million for 2016.
- Some of the income thresholds having to do with retirement contributions have been increased, although all contribution limits remain the same.
The biggest tax changes could be yet to comeThere are a few tax breaks that expired at the end of last year, which have not yet been renewed. This includes such popular items as state sales tax deductions, educator expenses, and the mortgage insurance deduction. As of this writing, these have not been renewed, but it's likely they will be extended for the 2016 tax year or beyond. Still, it's worth paying attention to this -- after all, it's never guaranteed that lawmakers will agree on anything.
The Foolish bottom line2016 isn't exactly a year full of major tax changes, but there have been a few modifications worth noting. The Affordable Care Act penalty is by far the most significant, and if you are uninsured, it's probably a good idea to figure out how much your penalty could be in 2016, and whether or not the cost would be comparable to simply buying insurance.
Other than that, the impact of the small adjustments to the tax brackets and other items mentioned here may put a few extra dollars in your pocket, but they are unlikely to have a noticeably largeimpact.
The article What Does 2016 Hold for Your Taxes? originally appeared on Fool.com.
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