11 Tax Changes You Need to Know About (and 1 You Probably Don't)
The 2017 tax season (for the 2016 tax year) is underway, and many households have already submitted returns. Though acting early is commendable, the Internal Revenue Service advises consumers to have all necessary documents (W-2s, annual statements, etc.) in hand before filing to avoid needing to make an amended return later. As is often the case, there are changes to forms, limits, and refund options to look out for. Tax software programs and accountants take care of the legwork, but it pays to research changes to avoid confusion.
The IRS partners with tax preparation software companies to offer qualified taxpayers a free way to prepare and file a federal (and sometimes state) tax return. For the 2017 tax season, the income limit for using the Free File software increased to $64,000 from $62,000 in 2016.
As with last year, the tax filing deadline is pushed to April 18 due to the celebration of Emancipation Day, a public holiday in Washington, D.C. In two New England states, the celebration of Patriots Day, which falls on April 18, means residents of Maine and Massachusetts have until April 19 to file their returns.
As part of an ongoing effort to fight fraud, some W-2s will have a 16-digit alphanumeric verification code listed on them this year. Don't worry if there isn't a code; the IRS is testing the system, so not every W-2 will have one. Even if taxpayers leave off or incorrectly fill in a verification code, it won't delay the processing of their tax returns.
To qualify for the Earned Income Tax Credit, taxpayers and qualified children must have valid Social Security numbers. Individual Taxpayer Identification Numbers and Adoption Taxpayer Identification Numbers cannot be used. Taxpayers used to be able to file an amended return and get the tax credit for previous years once a qualifying child got an SSN. Now, for the person to be eligible, the number must be issued before the due date for a tax return (April 18 or, with an extension, Oct. 18).
The Modified Adjusted Gross Income limits for contributing to Roth IRA accounts have been raised for 2016. Workers can contribute the full $5,500 maximum ($6,500 for those 50 and older) if they earn adjusted gross income of up to $117,000 for single filers or $184,000 for married couples filing jointly. Contribution amounts then phase out depending on one's MAGI. Those who already have contributed too much can avoid paying the penalty by withdrawing the excess contribution and earnings before filing.
The limits for many tax provisions changed in 2016 for inflation adjustments. For example, the standard deduction rose to $9,300 from $9,250 for those filing as head of household. The personal exemption also increased to $4,050, from $4,000, and now starts phasing out for individuals who made $259,400 or more.
The self-employed can take a deduction for eligible work-related use of their vehicle using the standard mileage rate, which dropped to 54 cents in 2016 from 57.5 cents in 2015 and will drop again to 53.5 cents for 2017. Taxpayers can also take a 19-cent-per-mile deduction for eligible miles driven for medical or moving purposes in 2016 (it'll be 17 cents for 2017). The standard mileage rate for charitable activities is unchanged at 14 cents.
Some taxpayers who use an Individual Taxpayer Identification Number may need to renew it before filing this year or risk a delayed refund or ineligibility for some tax credits. The first group of ITINs set to expire have either 78 or 79 as the middle digits or haven't been used to file a tax return for the previous three years.
Since 2014, people without health insurance have had to pay increasing penalties unless they qualify for a limited number of exemptions. In 2016, the penalty was the higher of $695 per adult or 2.5 percent of the household's AGI. The penalty is $347.50 for children under 18. The penalty is capped at $2,085 for a household, and it's paid when the tax return is filed. If additional tax is owed, the penalty is added to the amount due. If a refund is due, the penalty is deducted from the amount owed the taxpayer.
Taxpayers who got a Form 1099-C for canceled debt on their qualified principal residence will be happy to hear that, thanks to the Mortgage Forgiveness Debt Relief Act, the forgiven debt isn't considered income for 2016. Even when the cancellation of debt didn't occur until after the start of 2017, if the agreement was signed in 2016 it may be covered by the act.
Here's one most taxpayers won't need to know -- but Olympic and Paralympic medalists will be pleased to learn that the value of their medals is no longer taxable. Medalists who have an AGI over $1 million still have to claim the value of the metal as income, though.