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Annual Tax Guide - A Guide to 2017 Tax Law Changes (and More)
As taxpayers and tax preparers send in 1040 forms for 2016, they are also wondering about the changes to federal tax law that may occur in 2017 and 2018. Will President Trump's administration be able to follow through on his campaign pledge to cut corporate and estate taxes and revise individual income tax brackets? If the Affordable Care Act is repealed and replaced, how significant will the tax impact be for businesses, families, and individuals?
As it stands now, federal tax laws are changing little in 2017. The 2015 Protecting Americans from Tax Hikes (PATH) Act extended many tax breaks, which were set to expire in 2015, through at least 2018 and made others permanent (the $500,000 Section 179 deduction, charitable IRA gifts, the R&D tax credit, and more).
Still, there are some important things to note this tax season. This guide reviews:
Just a reminder as you read this guide: you should consult with a qualified tax or financial professional before making short-term or long-term changes to your tax or financial strategy.
Tax Season Deadlines
Wednesday, February 15
*Last day for 1099-B forms and 1099-S forms to be sent to taxpayers.
*Deadline for individual taxpayers to file a Form W-4 to claim exemption from withholding tax for 2017. 1,2
Tuesday, February 28
*Deadline for all businesses to file Information Returns to the IRS for certain 2016 payments (Forms 1097, 1098, 1099, 3921, 3922, or W-2G and Form 1096 summarizing and transmitting each form of payment). For businesses filing these forms electronically, this deadline is March 31 (although, employees, vendors, and freelancers must have received their copies of the relevant forms by January 31). 2
Wednesday, March 1
*Deadline for farmers and fishermen to file 2016 1040 forms. The deadline is April 18 for farmers and fishermen who paid their 2016 estimated tax on or before January 17. 2
Wednesday, March 15
* Form 1120/1120s filing deadline for calendar-year S corporations. S corps may apply for a 6-month extension on or before this date by filing Form 7004 with their 2016 corporate return. The extension stretches the deadline to September 15.
*Deadline for partnerships to file Form 1065 and to provide Schedule K-1s to each partner in a calendar-year partnership. Filing Form 7004 on or before this date will extend the filing deadline to August 15. This deadline used to fall a month later, but legislation passed in 2016 changed that. 1,2
Tuesday, April 18
*This is the 2017 federal income tax deadline for individuals – the last day to send in your 2016 1040 form .
*Last day to file Form 4868 for an extension (but you must submit your 2016 federal tax payment with your request for an extension). The deadline to file a 2016 individual income tax return with an extension is Monday, October 16.
*Last day to make 2016 IRA contributions , and also the last day to make SEP-IRA, Solo 401(k) and HSA contributions for TY 2016. If you wish, you can file a 6-month extension for your 2016 Solo 401(k) or SEP-IRA contribution, thereby making October 16 your "final final" contribution deadline.
* Form 1120/1120s filing deadline for calendar-year C corporations. C corps may apply for a 6-month extension on or before this date by filing Form 7004 with their 2016 corporate return. (October 16 is the deadline with an extension.) This annual deadline used to fall on March 15; now it falls on April 15 (with adjustments in accommodation of weekends and holidays).
*Deadline to send in an original or amended federal tax return for 2013 pursuant to claiming a refund. 2,3
Thursday, June 15
* Deadline for U.S. citizens and resident aliens living and working (or on military duty) outside the U.S. and Puerto Rico to file their 2016 federal returns. Filing Form 4868 with your 2016 tax payment by this date gives you until October 16 to turn in your 1040 form. 2
Social Security & Medicare Changes
1 Social Security benefits rise by 0.3% this year.
Any little increase is welcome for the nation's seniors, who have lived without Social Security COLAs for three of the past nine years.
For the record, this pushes the maximum monthly benefit for someone claiming Social Security at age 66 to $2,687; the maximum monthly benefit for a senior claiming at age 62 becomes $2,153, a $45 increase from 2016. The average monthly Social Security payment will rise by a little more than $4 to $1,360. 4,5
2 Social Security's Full Retirement Age (FRA) increases in 2017 for those newly eligible for benefits.
For Americans born in the years 1943-1954, the FRA is 66. Americans born in 1955 will turn 62 this year, and the FRA for them is 66 years and 2 months. In 2018, the FRA will rise to 66 years and 4 months for those born in 1956, and it will increase in 2019 to 66 years and 6 months for those born in 1957. The incremental increases will continue until the FRA becomes frozen at age 67 in 2022. 4,5
3 The Social Security withholding thresholds have risen.
Before and during the year you reach Full Retirement Age, Social Security withholds some of your benefits when your earned income surpasses certain thresholds.
If you have yet to reach your FRA, you may earn up to $16,920 in 2017 before having $1 in benefits withheld for each additional $2 in earned income above that level (a level that has increased by $1,200).
If you reach your FRA in 2017, you may earn as much as $44,880 before having $1 in benefits withheld for each additional $3 in earned income above that level (a level that has increased by $3,000). 5
4 Medicare Part B premiums have risen.
Since the 2017 COLA for Social Security is so small, the hold-harmless provision kicks in for the majority of Medicare recipients this year. The average Medicare recipient who has been receiving benefits for more than two years will pay Part B premiums of about $109 per month in 2017, as opposed to $104.90 in 2016.
Are you newly enrolled in Medicare? Are you enrolled in Medicare, but receive no Social Security benefits? Do you have your Part B premiums paid by your state's Medicaid program? If the answer is yes to any of those three questions, your monthly 2017 Part B premium is $134, as opposed to $121.80 last year.
Certain higher-income Medicare beneficiaries will pay larger Part B premiums reflecting a surcharge. This applies to single filers with MAGI above $85,000 and joint filers with MAGI above $170,000. If you find yourself in this group, you will pay monthly Part B premiums of somewhere between $187.50-$428.60 this year (up from $170.50-$389.80 in 2016). A monthly surcharge of $13.30-$76.20 will also be added to your Part D premiums for drug coverage (in 2016, that monthly surcharge ranged from $12.70-$72.90). 6
5 Medicare Part A & Part B deductibles have also increased.
In 2017, the Part A deductible (on hospital stays) is $1,316, which is $28 higher than in 2016. The yearly Part B deductible is $17 higher at $183. 6
6 Cost-of-living adjustments have been made to retirement savings accounts, health savings accounts, and basic Form 1040 items.
*Income Tax Brackets
They rise just slightly for 2017, as follows:
BracketSingle FilersMarried Filing JointlyMarried FilingHead of Household
or Qualifying WidowerSeparately
10% $1 - $9,325 $1 - $18,650 $1 - $9,325 $1 - $13,350
15% $9,326 - $37,950 $18,651 - $75,900 $9,326 - $37,950 $13,351 - $50,800
25% $37,951 - $91,900 $75,901 - $153,100 $37,951 - $76,550 $50,801 - $131,200
28% $91,901 - $191,650 $153,101 - $233,350 $76,551 - $116,675 $131,201 - $212,500
33% $191,651 - $416,700 $233,351 - $416,700 $116,676 - $208,350 $212,501 - $416,700
35% $416,701 - $418,400 $416,701 - $470,700 $208,351 - $235,350 $416,701 - $444,550
39.6% $418,401 and more $470,701 and more $235,351 and more $444,551 and more
A reminder: these tax brackets are based on your taxable income rather than your gross income. 7
This year, it rises as follows:
*Single filer or married filing separately: $6,350 ($50 higher than in 2016)
*Head of household: $9,350 ($50 higher than in 2016)
*Married couples filing jointly: $12,700 ($100 higher than in 2016)
In 2017, the additional standard deduction for the blind or aged is $1,250, $1,550 if the taxpayer is single without being a surviving spouse. 7
The portable lifetime individual gift and estate tax exemption rises by $40,000 in 2017 to $5.49 million. For married couples, the credit is $10.98 million. 8
*Earned Income Tax Credit
The maximum credit for families having three or more qualifying children is $6,318 in 2017. 7
In 2017, the ceiling on this credit is $13,570. If you are adopting a child with qualifying special needs, you can claim the full $13,570 credit. Your income may affect your eligibility for this credit, though. The credit you can potentially claim may be reduced if your MAGI surpasses $203,540; if your MAGI is $243,540 or greater, you are ineligble. 7
*Limit on Income Subject to Social Security Tax
In 2017, the taxable wage base rises to $127,200, compared to $118,500 in both 2015 and 2016. That $127,200 figure represents the maximum amount of earned income upon which a worker has to pay Social Security taxes. 9
*Alternative Minimum Tax Exemption
The new inflation-adjusted exemption amounts for 2017 are:
*Single filer: $54,300
*Married couples filing separately: $42,250
*Married couples filing jointly & surviving spouses: $84,500
*Trusts & estates: $24,100 7
*Defined Contribution Plan Annual Addition Limit
Last year, the cap on annual employer profit-sharing additions to these plans was set at $53,000. It becomes $54,000 for 2017. 11
*SEP Plan Contribution Limits
This year, the limit on employer contributions to a SEP plan rise. An employer can contribute up to $54,000 or up to 25% of eligible compensation per employee (up to a cap of $270,000). Last year, the caps were set at $53,000 and $265,000. The minimum compensation level stays at $600. 9
*Health Savings Account Contribution Limits (self-only policies)
The yearly contribution limit for a self-only policy increases $50 this year to $3,400. (An additional $1,000 catch-up contribution is allowed for those who will be 55 and older in 2017.) There is no change to the contribution limit on family policies this year. 10
*Maximum Out-of-Pocket Amounts for Medical Savings Accounts
The 2017 caps are $4,500 for self-only coverage (a $50 increase) and $8,250 for family coverage (a $100 increase). 12
*Maximum Out-of-Pocket Amounts for Health Plans Compliant with the Affordable Care Act
In 2017, the new limits are $7,150 for individuals, $14,300 for families. Last year, these limits were set at $6,850 for individuals, $13,700 for families. 10
*Annual Retirement Benefit Payable from a Defined Benefit Plan
In 2017, the cap is $215,000; last year, it was $210,000. 11
*Amount for Lengthening of 5-Year ESOP Period
This also rises by $5,000 this year to $215,000. 11
*Limit on ESOP Maximum Balance
This increases by $10,000 in 2017 to $1,080,000. 9
*Definition of a Key Employee
Last year, the dollar limitation linked to the definition of a key employee in a top-heavy plan was $170,000. In 2017, it rises to $175,000. 9
*Foreign Earned Income Exclusion
Set at $102,100 for 2017, it was at $101,300 last year. 12
No 2017 COLAs have been made to these limits:
*Personal Exemption (remains at $4,050) 7
*Annual Gift Tax Exclusion (remains at $14,000) 8
*IRA Contribution Limit (yearly cap of $5,500, with an additional $1,000 catch-up contribution permitted for those who will be 50 or older by the end of 2017) 9
*401(k), 403(b), 457 Plan Contribution Limits (cap on elective deferrals to these plans remains at $18,000, with an additional $6,000 catch-up contribution permitted for those who will be 50 or older by the end of 2017) 9
*SIMPLE Plan Contribution Limit ($12,500 with a $3,000 catch-up contribution permitted for those who will be 50 or older by the end of this year) 9
* Maximum Out-of-Pocket Amounts for HSA-Qualified High-Deductible Health Plans ($6,550 for individuals, $13,100 for families) 10
Phase-Out Range Adjustments for 2017
7 Some phase-out brackets have been adjusted higher for inflation.
Here are the adjusted gross income (AGI) phase-out ranges for 2017 (above the top end of these ranges, the personal exemption may not be claimed):
*Single filer: $261,500-$384,000
*Married couples filing jointly: $313,800-$436,300 7
*Pease Limitations on Itemized Deductions
The phase-out ranges are increasing this year:
*Single filer: phase-outs begin at $261,500
*Married couples filing separately: phase-outs begin at $156,900
*Head of household: phase-outs begin at $287,650
*Married couples filing jointly & surviving spouses: phase-outs begin at $313,800
When taxpayer incomes pass the Pease thresholds, the total of a taxpayer's itemized deductions are reduced either by 3% of the AGI exceeding the relevant threshold, or by 80% of the amount of itemized deductions otherwise permitted for TY 2017.
Deductions for charitable donations and state and local tax deductions may be reduced by Pease limitations. Pease limitations do not impact deductions for medical expenses, investment expenses, some property and casualty losses, and gambling losses. 7
*Alternative Minimum Tax
The AMT starts to phase out for taxpayers at the following levels this year:
*Single filer: $120,700
*Married couples filing jointly: $160,900
The AMT's 28% tax rate applies if taxpayers have taxable income above these thresholds:
*Married couples filing separately: $93,900
*All other taxpayers: $187,800 12
*IRA Contribution Deductions When You or Your Spouse Has Access to a Retirement Plan at Work
In 2017, the MAGI phase-out ranges are:
*Single filer or head of household: $62,000-$72,000 ($1,000 higher)
*Married couples filing jointly: $99,000-$119,000 ($1,000 higher)
*Married couples filing separately: $0-$10,000 (it never changes)
Below the phase-out ranges, you may claim a dollar-for-dollar deduction for contributions to a traditional (i.e., deductible) IRA. These are not phase-outs affecting the amount of your traditional IRA contributions. They only affect the amount of the deduction you may take on your 1040 form for making them in 2017. 13
*IRA Contributions if You Lack Access to a Workplace Retirement Plan, but Your Spouse Has Access to Such a Plan
The increase in the most important of the two MAGI phase-out ranges here is slight, but notable.
*Married couples filing jointly: $186,000-$196,000 ($2,000 higher)
*Married couples filing separately: $0-$10,000 (it never changes) 13
*Roth IRA Contributions
Your ability to make a 2017 Roth IRA contribution is reduced when your MAGI falls into these phase-out ranges. If it exceeds the high end of these ranges, you cannot make a 2017 Roth IRA contribution.
*Single filer or head of household: $118,000-$133,000 ($1,000 higher)
*Married couples filing jointly: $186,000-$196,000 ($2,000 higher)
*Married couples filing separately: $0-$10,000 (it never changes) 13
*Lifetime Learning Credit
This year, the phase-out ranges start slightly higher: $56,000 for single filers, $112,000 for joint filers. 7
Key Tax Breaks That Expired in 2016
Unless legislators move to retroactively reinstate these federal tax perks, we have seen the last of them. (Perhaps you can claim them on your 2016 return.)
8 Alternative Motor Vehicle Tax Credit
Last year, taxpayers who bought new fuel-cell cars and SUVs could claim a 2016 federal tax credit based on the make and model of their vehicle. (They had to buy the vehicle, not lease it.) No more. 14,15
9 Qualified Plug-In Electric Drive Motor Vehicle Tax Credit
This credit was linked to the purchase of new e-bikes (driven by electric motors) with batteries that could be plugged in and recharged through an external source of electricity. 14
10 Itemized Deduction for Mortgage Interest Premiums
Homeowners could itemize payments for either home loan interest or mortgage insurance premiums in 2016. This year, they cannot. 14
11 Mortgage Debt Forgiveness Deduction
Forgiven or cancelled debt is usually taxable. In response to the mortgage crisis of the late 2000s, Congress passed legislation letting financially troubled homeowners have a tax break on forgiven or reduced mortgage debt that would ordinarily be taxed. Up to $2 million of such debt on a principal residence could be excluded from taxation thanks to this break. With the mortgage crisis in the rear-view mirror, the deduction has been allowed to disappear. 15
12 Medical Expense Deduction Starting at 7.5% of AGI for Individuals Ages 65 & Older (and Spouses)
The actual deduction opportunity hasn't disappeared, but the threshold to claim the medical expenses deduction is higher in 2017. In 2016, taxpayers 65 or older could claim this deduction if their qualified medical expenses were greater than 7.5% of their adjusted gross income. Now, it can only be claimed when these expenses exceed 10% of AGI. 16
13 Nonbusiness Energy Property Credit
This was a 10% credit for the price of energy-efficient home improvement products that cost between $50-$500. The credit had a $500 lifetime limit and could be applied only to products bought for a taxpayer's existing, primary residence. 14,15
14 Tuition & Fees Deduction
This was an above-the-line deduction that could be taken even when a taxpayer didn't itemize. It could be as large as $4,000 and could be claimed for any qualifying tuition and fees you paid for yourself, your spouse, or a dependent. Even if those expenses were paid for with a student loan, the deduction could still be claimed. This deduction (which was subject to phase-outs at higher income levels) could be claimed instead of the American Opportunity Credit or the Lifetime Learning Credit. 14,15,16
Other Interesting Developments
15 50% bonus depreciation will end this year.
Businesses will soon see a gradual phase-out for immediate expensing of assets they acquire. In 2017, a company can still take a 50% bonus depreciation deduction, but the ceiling on the deduction lowers to 40% in 2018 and 30% in 2019. As it stands now, this deduction is slated to disappear in 2020. Whether it is extended past that date or not, its oncoming phase-out could significantly impact taxable income and cash flow at businesses. Of course, a company could elect to use the Section 179 deduction for new and used equipment, which has a $500,000 yearly limit. 17
16 The IRS will wait until February 15 to process any refunds due to taxpayers claiming the Earned Income Tax Credit (EITC) or refundable Additional Child Tax Credit (ADTC) for TY 2016.
Taxpayers with lower incomes may be eligible to claim the EITC. When the standard Child Tax Credit (CTC) surpasses a person's federal tax liability, that person may claim the refundable ADTC in response (which can be as large as $1,000). Claiming either of these credits for 2016 makes it extremely unlikely that your 2016 refund will reach you before the end of February. 1
17 Taxpayers without health coverage may or may not have to pay an individual penalty in 2017.
In an executive order signed on January 20, President Donald Trump called for departments of the federal government to "waive, defer, grant exemptions from, or delay the implementation" of provisions of the Affordable Care Act placing financial penalties on states, businesses, or individual taxpayers. This was widely interpreted as a directive to jettison the individual penalty for not having health coverage as well as other penalties linked to avoidance of the ACA's regulations. When 2017 began, the individual taxpayer penalty for going without minimum essential health coverage was either 2.5% of a taxpayer's household income or $695, whichever was higher. If the Trump administration follows through on its intention to replace the ACA in 2017, the individual health insurance mandate (and the penalties resulting from foregoing health insurance coverage) may vanish this year. 18,19
18 Vehicle mileage rates are decreasing slightly.
Last year, a taxpayer who used some kind of automobile for business, medical, or charitable purposes, or for a move could deduct $0.54 per mile for business miles, $0.19 for moving miles and miles driven for medical purposes, and $0.14 per mile when driving in the service of a qualified charity. This year, the rates are $0.535 for business miles, $0.17 for moving and medical miles, and $0.14 for charity miles. 20
19 2017 may mark the last year for the suspension of the 2.3% excise tax on medical devices.
Medical device manufacturers may not have to worry about this tax coming back. It may disappear altogether in 2018, as lawmakers in both the House of Representatives and Senate introduced bills in January to repeal it. The tax was first waived in 2016. 21
20 Some taxpayers who haven't filed a Form 1040 recently may need new Individual Taxpayer ID Numbers.
Usually, a Social Security Number functions as an ITIN. Some U.S. residents do not have SSNs, yet still file federal taxes. They are issued ITINs, which are not SSNs.
When the 2015 Protecting Americans from Tax Hikes (PATH) Act became law, it established that an ITIN will expire for these taxpayers if they go three years without filing a federal return or being listed as a dependent on another individual's federal return. So, if a taxpayer's ITIN hasn't been used on a 1040 form at least once in 2014, 2015, or 2016, he or she will have to get a new one in 2017 to file a federal tax return for this year. Taxpayers in this category who were issued an ITIN prior to 2013 will be asked to renew that ITIN sometime during 2017-2020. 16
Do these tax law changes prompt any concerns or questions? If they do, please feel free to contact me at 4193584207 or via email at firstname.lastname@example.org. I will be happy to discuss them with you.
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This Special Report is not intended as a guide for the preparation of tax returns. The information contained herein is general in nature and is not intended to be, and should not be construed as, legal, accounting or tax advice or opinion. No information herein was intended or written to be used by readers for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Readers are cautioned that this material may not be applicable to, or suitable for, their specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. Readers are encouraged to consult with professional advisors for advice concerning specific matters before making any decision. Both Gary Reese and MarketingPro, Inc. disclaim any responsibility for positions taken by taxpayers in their individual cases or for any misunderstanding on the part of readers. Neither Gary Reese nor MarketingPro, Inc. assume any obligation to inform readers of any changes in tax laws or other factors that could affect the information contained herein.
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2 - irs.com/articles/2017-federal-tax-calendar [1/22/17]
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11 - benefitsattorney.com/charts/maximums/ [11/14/16]
12 - irs.gov/uac/newsroom/in-2017-some-tax-benefits-increase-slightly-due-to-inflation-adjustments-others-are-unchanged [10/25/16]
13 - fool.com/retirement/2017/01/18/ira-phaseouts-how-will-they-affect-my-retirement-s.aspx [1/18/17]
14 - efile.com/new-tax-breaks-cuts-changing-extended-expired-laws/ [1/26/17]
15 - accountingweb.com/tax/individuals/will-these-six-expired-tax-breaks-be-revived [1/25/17]
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19 - goerie.com/news/20170115/erie-county-residents-signing-up-for-obamacare-at-record-pace [1/17/17]
20 - marketwatch.com/story/these-key-tax-breaks-will-be-expiring-at-the-end-of-2016-2016-12-28 [12/28/16]
21 - tctmd.com/news/controversial-medical-device-tax-may-be-overturned-affordable-care-act-scuttled [1/17/17]