2017 Income Tax Update

  • December 21, 2016

 

Income Tax Update

The American Taxpayer Relief Act of 2012 (ATRA), which was enacted in 2013, made many tax changes affecting 2014 and later years.  ATRA put some new taxes and tax deduction phaseouts on the books.  Some of these that will impact tax returns for 2017 and later years are:

  • 6% tax bracket
  • 20% capital gains tax rate for higher income taxpayers
  • 9% additional Medicare tax on higher earned income taxpayers
  • 8% tax on net investment income for higher income taxpayers
  • Phaseout limits for itemized deductions and personal exemptions
  • Medical expenses must now exceed 10% of AGI
  • Higher estate tax exemption of $5.49 million, as a result of cost of living increases for 2017
  • The annual gift tax exclusion remains at $14,000 per donee for 2017

On October 25, 2016, the IRS announced the 2017 annual inflation adjustments for more than 50 provisions.  Many 2017 tax brackets, standard deductions, personal exemptions, phaseout limits and other items have increased slightly over the 2016 amounts.  These adjustments will benefit most taxpayers.

On December 18, 2015, the President signed into law the Protecting Americans From Tax Hikes Act of 2015 (PATH), giving tax relief to families, individuals and businesses.  Some of the more popular items, affecting tax returns for 2017 and later years, are the enhanced child tax credit, deduction for certain expenses of school teachers, deduction of state and local sales taxes, American Opportunity Tax Credit (AKA College Tuition Credit), deduction of qualified higher education tuition and related expenses (expired for 2017), bonus depreciation (50% – 2017, 40% – 2018, 35% – 2019), increased Section 179 expensing deduction for small business and many other provisions.

Also, continuing in 2017 and for future years, are the provisions of the Affordable Care Act of 2010 (“Obamacare”), regarding mandatory health insurance coverage. This Act requires that most individuals and their dependents have qualified health insurance coverage, or else pay a penalty for not being covered.  There are certain exemptions from the coverage requirement.  In addition, tax credits are available to lower income people and families who purchase their insurance through a Health Insurance Marketplace. 

Big Income Tax Items for 2017 

Since tax news is typically only relished by those who enjoy doing tax work for a living, and less interesting to the rest of us, here we’ll stick to the highlights.

Tax Brackets

All current tax rate brackets have increases for 2017.  For 2017, the 39.6% rate affects couples with taxable incomes over $470,700 and single filers with taxable incomes over $418,400.  The U.S. has a graduated tax system which means that the incremental portion of your taxable income, which falls in the bracket, is taxed at the rate beside it for 2017. (See following tax rate chart)

TAX RATE 2017 MARRIED FILING JOINTLY SINGLE FILERS
10% $0-$18,650 $0-$9,325
15% $18,651-$75,900 $9,326-$37,950
25% $75,901-$153,100 $37,951-$91,900
28% $153,101-$233,350 $91,901-$191,650
33% $233,351-$416,700 $191,651-$416,700
35% $416,701-$470,700 $416,701-$418,400
39.6% Above $470,700 Above $418,400

 

Alternative Minimum Tax (AMT)

If you have a lot of “passive income,” or large itemized deductions, you may be subject to what is known as the AMT.  The AMT computes taxable income under a different scheme than the regular income tax.  It attempts to take back some of the tax breaks given by the regular tax calculation.  You are required to pay taxes under the AMT, if that tax calculation results in a higher tax.

  • The AMT exemption for 2017 is $84,500 for couples and $54,300 for singles.
  • The AMT exemptions are indexed for inflation for future years. Non-refundable credits against the AMT are allowed.

As in the past, those with high itemized deductions for state and local taxes and miscellaneous deductions, or a large number of dependents, may be hit with the AMT.  The higher exemptions provide greater protection from (or can lessen the impact of) the AMT for these taxpayers. 

Capital Gains Rates 

The capital gains tax rates of 0% and 15% remain the same for 2017, as well as the 20% rate for those subject to the 39.6% income tax bracket. This 20% capital gains rate applies for both regular and AMT tax purposes. The different rates that apply to collectibles (28%) and depreciated real estate (25%) also remain the same. (See following tax rate chart)

Capital Gains Rate Income Tax  Bracket Married Filing Jointly Single Filers
0% 15% or lower Up to $75,900 Up to $37,950
15% 25%-35% $75,901-$470,700 $37,951-418,400
20% 39.6% Above $470,700 Above $418,400

NOTE:  Because there is now a 3.8% Medicare tax on net investment income, the top capital gains tax rate will really be 23.8% (and not 20%) for many top earners.

Phaseout of Itemized Deductions and Personal Exemptions 

Deductions are phased out for higher income taxpayers.  Filers with 2017 AGI above the phaseout threshold amounts ($313,800 for joint filers and $261,500 for single filers) will lose part of their itemized deductions and/or personal exemptions as follows:

  • For 2017 itemized deductions, the phase-out is 3% of the amount above the threshold. For example, a couple earning $350,000 would lose itemized deductions of $1,086 (.03 x $36,200 [ $350,000 – $313,800 = $36,200]).
  • Personal exemptions for 2017 are $4,050 per person. The phase-out is 2% of total exemptions claimed for every $2,500 of AGI above the threshold. In short, married couples with AGI above $436,300 and singles over $384,000 will lose the full value of their personal exemptions.

Contact An Experienced Estate Planning Lawyer

Please contact the firm of Susan G. Parker Esq. PC if you have any questions or concerns about your taxes, accounting, retirement savings, estate planning or business planning.  We can be reached at (888) 305 – 2009.