The Internal Revenue Service (IRS) published its annual cost of living adjustments (COLAs) affecting dollar limitations for retirement plan contributions, as well as other retirement-related items for the upcoming tax year.
Heading into 2016, many key numbers will stay the same, according to the IRS, including the headline-grabbing $18,000 limit on annual 401(k), 403(b), most 457 plans and the federal’s government’s Thrift Savings Plan contributions. The catch-up contribution limit of $6,000 also remains the same.
“In general, the pension plan limitations will not change for 2016 because the increase in the cost-of-living index did not meet the statutory thresholds that trigger their adjustment,” the IRS explains. “However, other limitations will change because the increase in the index did meet the statutory thresholds.”
In the end, the annual deferral increases or freezes don’t do all that much to impact retirement readiness at large in the U.S., experts suggest, but for some individuals an increase in the limits can be quite meaningful. Especially for the fortunate few who are able to meet the deferral limit year in and year out, regular increases in the IRS deferral limits can greatly boost one’s wealth by age 65, in some cases by hundreds of thousands of dollars by the end of the investing lifecycle.
Even for people saving below the high-water mark permitted by the IRS, enacting a $500 increase in annual savings—a number matching the last annual increase enacted by the IRS for tax year 2015—can result in an extra $110,000 return over a 40-year time horizon. Still, a survey published earlier this year by Fifth Third Bank finds a vast majority of Americans cannot identify the Internal Revenue Service’s limits placed on annual tax-advantaged retirement plan deferrals.
NEXT: Specific changes and freezes
The highlights of limitations that changed from 2015 to 2016 include the following:
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $184,000 and $194,000, up from $183,000 and $193,000.
- The AGI phase-out range for taxpayers making contributions to a Roth individual retirement account (IRA) is $184,000 to $194,000 for married couples filing jointly, up from $183,000 to $193,000. For singles and heads of household, the income phase-out range is $117,000 to $132,000, up from $116,000 to $131,000.
- The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $61,500 for married couples filing jointly, up from $61,000; $46,125 for heads of household, up from $45,750; and $30,750 for married individuals filing separately and for singles, up from $30,500.
The highlights of limitations that remain unchanged from 2015 include the following:
- The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $18,000.
- The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $6,000.
- The limit on annual contributions to an individual retirement arrangement remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
- The deduction for taxpayers making contributions to a traditional IRA is phased out for those who have modified adjusted gross incomes (AGI) within a certain range. For singles and heads of household who are covered by a workplace retirement plan, the income phase-out range remains unchanged at $61,000 to $71,000. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range remains unchanged at $98,000 to $118,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
- The AGI phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
NEXT: Tax provisions updated
The IRS also announced that, for tax year 2016, adjustments will be made to “more than 50 tax provisions,” including the tax rate schedules, and other tax changes. Revenue Procedure 2015-53 provides details about these annual adjustments.
According to the IRS, the tax items for tax year 2016 of greatest interest to most taxpayers include the following dollar amounts:
- For tax year 2016, the 39.6% tax rate affects single taxpayers whose income exceeds $415,050 ($466,950 for married taxpayers filing jointly), up from $413,200 and $464,850, respectively. The other marginal rates—10%, 15%, 25%, 28%, 33% and 35%—and the related income tax thresholds for tax year 2016 are described in the revenue procedure.
- The standard deduction for heads of household rises to $9,300 for tax year 2016, up from $9,250, for tax year 2015.The other standard deduction amounts for 2016 remain as they were for 2015: $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly.
- The limitation for itemized deductions to be claimed on tax year 2016 returns of individuals begins with incomes of $259,400 or more ($311,300 for married couples filing jointly).
- The personal exemption for tax year 2016 rises $50, to $4,050, up from the 2015 exemption of $4,000. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $259,400 ($311,300 for married couples filing jointly). It phases out completely at $381,900 ($433,800 for married couples filing jointly).
- The Alternative Minimum Tax exemption amount for tax year 2016 is $53,900 and begins to phase out at $119,700 ($83,800, for married couples filing jointly for whom the exemption begins to phase out at $159,700). The 2015 exemption amount was $53,600 ($83,400 for married couples filing jointly). For tax year 2016, the 28% tax rate applies to taxpayers with taxable incomes above $186,300 ($93,150 for married individuals filing separately).
- The tax year 2016 maximum Earned Income Credit amount is $6,269 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,242 for tax year 2015. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
- For tax year 2016, the monthly limitation for the qualified transportation fringe benefit remains at $130 for transportation, but rises to $255 for qualified parking, up from $250 for tax year 2015.
- For tax year 2016, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,250, up from $2,200 for tax year 2015; but not more than $3,350, up from $3,300 for tax year 2015. For self-only coverage the maximum out-of-pocket expense amount remains at $4,450.
- For tax year 2016 participants with family coverage, the floor for the annual deductible remains as it was in 2015—$4,450; however, the deductible cannot be more than $6,700, up $50 from the limit for tax year 2015. For family coverage, the out-of-pocket expense limit remains at $8,150 for tax year 2016 as it was for tax year 2015.
- For tax year 2016, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $111,000, up from $110,000 for tax year 2015.
- For tax year 2016, the foreign earned income exclusion is $101,300, up from $100,800 for tax year 2015.
- Estates of decedents who die during 2016 have a basic exclusion amount of $5,450,000, up from a total of $5,430,000 for estates of decedents who died in 2015.