The IRS recently issued a long list of cost of living adjustments (COLAs) for various Tax Code provisions that are required to be adjusted annually for inflation, including many related to retirement savings. These COLAs are for the 2016 tax year. Those that are dependent upon the CPI-U index average from September 2014 through August 2015 include the federal income tax brackets, Alternative Minimum Tax exemptions, and many other figures. Because of inflation and rounding conventions, many provisions increase for 2016.
Nearly all retirement plan contribution and benefit limit amounts, however, will remain the same for 2016 as for 2015. These amounts include those for certain retirement savings vehicles including defined contribution plans, defined benefit plans, employee stock ownership plans (ESOPs), and individual retirement arrangements (IRAs).
Tax rates, exemptions, standard deduction
For 2016, the minimum income amounts at which the top 39.6-percent tax rate will kick in will rise to:
- $466,950 (from $464,850) for married joint filers
- $441,000 (from $439,000) for heads of households
- $415,050 (from $413,200) for unmarried filers
- $233,475 (from $232,425) for married separate filers
The personal exemption amount increases to $4,050 for 2016, up from $4,000 in 2015.
The standard deduction for single, married filing jointly, and married filing separately filers is expected to remain the same for 2016. The standard deduction for heads of household, however, rises from $9,250 for 2015 to $9,300 for 2016.
The alternative minimum tax exemptions will increase for filers as follows:
- For married joint filers and surviving spouses, the exemption will be adjusted upward to $83,800, up from $83,400 for 2015.
- For unmarried single filers and heads of households, the 2016 exemption will be $53,900, up from $53,600 for 2015.
- For married separate filers, the exemption will increase to $41,900, up from $41,700 in 2015.
Among the many adjustments published by the IRS are these (this is not an exclusive list):
Elective deferrals. The limits on elective deferrals for employees who participate in 401(k)s, 403(b)s, certain 457s, and Thrift Savings Plans remain $18,000.
Catch-up contributions. Eligible individuals age 50 and above may make catch-up contributions to IRAs, 401(k)s and other savings arrangements. The catch-up amount for 401(k)s, 457s, 403(b)s, and SEPs, remains $6,000 for 2015. The additional catch-up contribution amount to IRAs also remains at $1,000.
Defined contribution plans. The limitation for Code Sec. 415(c)(1)(A) defined contribution plans remains $53,000 for 2016.
Traditional IRAs. For 2016, the maximum deductible amount under Code Sec. 219(b)(5)(A) for an individual making qualified retirement contributions to traditional IRAs and similar plans will remain $5,500. The allowable IRA deduction will phase out when modified AGI is between $61,000 and $71,000 for single taxpayers who are active participants in an employer-sponsored retirement plan (the same as for 2015). For married couples filing a joint return, where the spouse making the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $98,000 to $118,000 (up from $96,000 to $116,000 for 2014). However, for married joint filers where only one spouse is an active participant in an employer-sponsored retirement plan, the income phase-out increases to $184,000 through $194,000 for 2016.
Roth IRAs. Contributions to a Roth Individual Retirement Account (IRA) are limited for taxpayers with adjusted gross income above certain limits adjusted annually for inflation. For 2016, the allowed Roth IRA contribution amount phases out for married taxpayers filing jointly with income between $184,000 and $194,000 (up from $183,000 and $193,000 for 2015). For heads of household and unmarried filers, the phase-out range is between $117,000 to $132,000 (up from $116,000 to $131,000 for 2015).
The IRS announcement also included the following figures that remain the same for 2016:
- The Code Sec. 414(q)(1)(B) limit used in the definition of a “highly-compensated employee” is set for 2015 at $120,000.
- The dollar limit used within the definition of “key employee” in a top heavy plan remains $170,000 for 2016.
- The compensation amounts relevant to the definition of “control employee” for fringe benefit valuation purposes remains $105,000 for 2016. The compensation amount under Reg. §1.61-21(f)(5)(iii) is $215,000 for 2016.
Social Security wage base
At the same time the IRS issued the qualified retirement plan COLAs, the Social Security Administration (SSA) announced the maximum amount of earnings subject to OASDI Social Security tax. The 2016 wage base will remain $118,500.
The SSA figures also included the 2016 domestic employee coverage threshold, which is often called the “nanny tax.” Adjusted for inflation, the amount is $1,900, which is unchanged from the previous year. If a taxpayer pays a domestic household employee more than $1,900 during the year, he or she is responsible for withholding and paying FICA taxes on the employee’s behalf.