2016 Tax Changes (Wall Street Journal)

By 

LAURA SAUNDERS

January 8, 2016

A new year usually brings tax changes, and 2016 is no exception.

The good news is that last month, in the nick of time, Congress enacted permanent extensions of several popular provisions, including the American Opportunity tax credit, a higher-education benefit; the IRA charitable transfer provision for people 70 1/2 and older; certain mass-transit benefits; a child tax credit; and the ability to deduct state sales taxes instead of income tax on the federal return.

No longer will people using these benefits have to bite their nails waiting for lawmakers to re-enact them—especially if a provision has already expired, as happened several times over the past decade.

Here are other changes to be aware of:

Affordable Care Act penalty tax. For people who don’t have ACA-approved health insurance, the payment is rising steeply once again. Such taxpayers often owe a “shared responsibility payment” that is either a flat assessment or a percentage of income, whichever is higher. Roberton Williams, a tax specialist with the Tax Policy Center in Washington, says the percentage method will apply to virtually all higher-income households and even many single filers earning above $40,000.

In 2016, the flat assessment more than doubles. It is now $695 per individual, up from $325 last year, with a maximum of $2,085 per household. The percentage-of-income payment rises to 2.5% of income from 2% last year, with a projected maximum of about $13,400 per household.

Members of some groups aren’t subject to the payment, including certain religious groups and people covered by Medicare or Medicaid. The Tax Policy Center has posted anACA penalty calculator on its website.

Tax rates haven’t changed for 2016, but brackets have reset upward because of inflation indexing. 

Tax brackets. Because the U.S. tax code is progressive, higher income is taxed at higher rates—after deductions, exclusions and other adjustments. Tax rates haven’t changed for 2016, but brackets have reset upward due to inflation indexing. The top statutory rate of 39.6% now kicks in above $466,950 of taxable income for married couples filing jointly and $415,050 for singles.

“It’s good to know your top bracket, because it lets you estimate the value of a deduction,” says Greg Rosica, a partner with the accounting firm EY. In other words, $100 of a write-off could save as much as $28 of tax for someone in the 28% bracket.

A glance at the tax tables also serves as a reminder of the code’s unequal treatment of married couples versus single people who are above the 15% bracket. This anomaly raises tax bills substantially for some couples, especially if both partners have similar incomes, and lowers them for others. To find out if you are affected, see the Tax Policy Center’s marriage tax calculator.

Investments. The favorable rates on long-term capital gains (for investments held longer than a year) and certain dividends also haven’t changed for 2016, but inflation adjustments have lifted the brackets.

This year the 0% rate, which applies to both types of income, ends at $37,650 of taxable income for single filers and $75,300 for couples. Meanwhile, the top rate of 20% kicks in at $415,051 for single filers and $466,951 for couples.

In addition, some investors owe a 3.8% surtax on their net investment income. The threshold is $250,000 of adjusted gross income for married couples and $200,000 for singles.

This levy can cast a wider net than it appears to at first glance. That is because a taxpayer’s adjusted gross income is often much larger than taxable income, as it excludes Schedule A write-offs such as for mortgage interest, state taxes and charitable gifts. In addition, the thresholds aren’t indexed for inflation, so more investors could owe this surtax in 2016.

Mileage deductions. Lower gas prices are a boon, but they translate to lower mileage deductions on tax returns. For 2016, the business rate is 54 cents per mile driven versus 57.5 cents per mile last year.

The write-off per mile driven in the service of a charitable group is 14 cents this year, and the rate per mile driven for moving or medical purposes is 19 cents. Be sure to keep records to document these deductions.

Estate and gift tax. For 2016, the estate and gift tax exemption rises to $5.45 million per individual, up slightly from the 2015 level. This means the exemption per couple is now nearly $11 million, and only some 4,400 people will owe this tax for 2015, according to estimates by the Tax Policy Center.

The annual gift exclusion of $14,000 isn’t changing for 2016. This provision allows a giver to make tax-free transfers of up to $14,000 a year to each recipient, and one partner of a married couple can transfer up to $28,000 per recipient if the other spouse doesn’t use the break.

Corrections & Amplifications: 
The 28% tax bracket for single filers begins at $91,151. An earlier version of the chart accompanying this article incorrectly gave the figure as $90,151. (Jan. 8)

Write to Laura Saunders at laura.saunders@wsj.com

Why You Should Contribute to Your IRA Now - Social Security is Not Enough (ICMA Retirement Corporation)

Growth of Retiree Costs Versus Social Security Benefits 2000-2015

Chart of the Week for November 6, 2015 - November 12, 2015

Inflation is one of the many factors that people planning for retirement should consider. Its compounding effect over time can erode retiree's standard of living in retirement years. Since inflation does not impact all products and services evenly, people planning for retirement need to factor on inflation for the products that they purchase.

Recently, the Social Security Administration announced that for the third time in six years, there will be no cost of living adjustment increase for Social Security recipients, as the average inflation rate continues to be low. The chart above compares the growth of Social Security benefits to the inflation of some expenses incurred by retirees for the time period 2000-2015. While benefits grew by 43% during the period, expenses such as Medicare Part B rose 131% and Heating Oil rose 159%. The inflation of many products and services grew by multiples of the benefits growth rate. This trend reinforces the thought that Social Security should only be one part of your retirement strategy if you are seeking to maintain your standard of living in retirement.

© Copyright 2015 ICMA Retirement Corporation, All Rights Reserved. This information is intended for educational purposes only and is not to be construed as investment advice or a solicitation to buy or sell securities. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed here. Past performance is not necessarily indicative of future performance.

Young Retirees: Can you use Obamacare before Medicare? (Morningstar)

Obamacare and the Early Retiree

One of the biggest risks for the early retiree has been the rising cost of health care and the pressure on savings when health issues arise.  

Helen Modly and Tommie Monez, 04/17/2014

We've all seen it--clients who are unrealistic about their spending habits, overly optimistic about the strength of their portfolios and the direction of the markets, and who just can't wait to embark on a leisurely retirement in their 50s or early 60s. But all too often, health-care expenses in the period between early retirement and Medicare eligibility have cratered those plans and dreams.

Enter Obamacare. Love it or hate it, the Affordable Care Act (ACA) offers an element of predictability in the health-care marketplace. Premiums based on pre-existing conditions are a thing of the past. The only criteria for setting premiums are age, geography, family size, and whether or not the applicant is a smoker. And, interestingly, not all states consider smoking status when setting premiums.
Levels of Coverage  There are four levels of coverage designated as Bronze, Silver, Gold, or Platinum. Premiums are lowest at the Bronze level and highest at Platinum. The difference is the out-of-pocket costs, which are highest for Bronze and lowest for Platinum. Bronze plans cover approximately 60% of the enrollee's total cost, 70% for Silver, 80% for Gold, and 90% for Platinum.

All plans must cover "essential health benefits" such as preventive care, prescription drugs, lab services, mental health treatment, pediatric care, maternity care, hospitalization, and emergency services (with no pre-authorization required). There are no longer lifetime limits on the amount of coverage.

Health-Care Premiums  Under the old rules, basically there were no rules. The insurance companies could use occupation, age, health history, or more to determine premiums. Under the ACA, rates for older adults cannot exceed three times the rate of a younger person. This is the heart of the concern that not enough young people will participate in ACA plans for the economics to be financially viable. However, this pricing restriction can be very beneficial to the younger retiree.

Premium Subsidies This is where the planning opportunity comes in. Government subsidies in the form of a tax credit will be available to help pay insurance premiums based on income. This assistance is available for people with family income that is between 100% and 400% of the federal poverty level. For 2014 that range is $15,730 to $62,920 for a family of two.

Premium calculations for purposes of the subsidy are based on the second lowest-cost Silver Plan, although the participant is free to choose a higher- or lower-cost plan. The maximum premium for those eligible for the subsidy is between 2% and 9.5%, based on family income. Since health-care premiums are higher for older people but the amount of the subsidy is based on income, the older enrollees derive a greater relative benefit.

Family income is defined as modified adjusted gross income (MAGI) using the IRS definition. MAGI includes wages, salary, foreign income, interest, and dividends. It also includes non-taxable income (i.e., muni bond interest) and non-taxable Social Security income. MAGI does not include income in the form of gifts or inheritance, and it does not take assets into account.

Here's how it works:

•  Sally and Russell are 62-year-old non-smokers earning $40,000 per year. This is 258% of the Federal Poverty Level
• Their maximum premium is 8.28% of income, or $3,312 per year ($276/month)
•  Annual premium for the Silver Plan is $14,500 (varies by state)
•  Government subsidy is $11,188 (77% of the plan cost)
•  Premium cost for Sally &  Russell is $276 per month if they choose the Silver Plan
•  In this Silver Plan, the maximum annual cost for health care is capped at $12,700 over and above the premium. Preventive services are covered without cost sharing.
•  For planning purposes, the worst-case scenario would be health-care costs of $16,012 per year ($3,312 premiums + $12,700 out-of-pocket expenses), or $1,334 per month.
• Cost sharing varies according to the plan type. A Platinum plan would have the highest premiums and lowest cost sharing limits.

How to Enroll An open enrollment period will be scheduled at the end of each year to purchase coverage effective the following year. 2014 open enrollment is Nov. 15, 2014, through Feb. 15, 2015. Coverage begins Jan. 1, 2015, if enrolled by the end of 2014. Enrollment may also be allowed throughout the year if there is a qualifying event such as marriage, birth of a child, or loss of employer coverage.

Is There a Catch? The premium subsidy is only available for participants who sign up using the exchanges, also known as the marketplace. Participants who purchase qualifying plans through health insurance brokers are not eligible for the tax credit. Clients who prefer to use a specific physician may find that the doctor participates in broker-sold plans, but not necessarily in the exchange-offered plan.

Individual health insurance plans in place on or before March 23, 2010, are grandfathered under ACA. They are not required to provide the essential benefits mandated by the ACA and therefore do not qualify for the premium subsidy.

What Happens if the Participant Makes Too Much Money? This is similar to any other underpayment or overpayment of taxes. When applying for health insurance on the exchange, applicants give their best guess as to income for the coming year. They can apply all, part, or none of the subsidy to the premium. At tax time, the account is settled as part of the personal income tax filing. If the income estimate is too high, some or all of the subsidy may need to be returned. If income is lower than expected, or if the taxpayer elected not to apply the subsidy to the insurance premium, the subsidy will come in the form of a refund.

Making the Numbers Work

•  Lower the MAGI--Bronze plan participants may be able to contribute to a Health Savings Account, which reduces the MAGI.
• Contribute to an IRA--If the early retiree has worked part time or retired during the year, he or she may be eligible for a deductible IRA, which will reduce the MAGI--a great last-minute planning opportunity.
• Prepare income and dividend projections for the existing portfolio.
•  Consider dividend and income before making changes to asset allocation.
• Determine whether or not smoothing income or staggering high- and low-income years provides the greater benefit.

The system was designed to make health-care costs comprehensive and affordable at all income levels. Right or wrong, by ignoring assets as a criteria, the system can also provide benefits for those who are relatively affluent. Whether or not the early retiree is eligible for subsidies or prefers to shop outside the exchanges, advisors now have better tools for predicting future health-care costs than in the past. Removing the fear of financial ruin due to unpredictable health-care costs should make for a more carefree retirement.

Changes in Medicare for 2013 (Marketwatch)

5 mistakes retirees make choosing a Medicare plan

BY kristen gerencher,

MarketWatch

Copyright © 2012 Dow Jones & Company, Inc. All Rights Reserved.

MarketWatch — 11/13/12

If you have Medicare coverage or you help someone who does, it's time for your annual homework assignment: comparing your options during open enrollment to see if you can do better.

It can be intimidating, but the payoff for your effort: potential savings of hundreds to thousands of dollars.

Through Dec. 7, Americans enrolled in Medicare, the federal health-insurance program for people 65 and older and the disabled, can make changes to how they receive their benefits. Those changes will take effect Jan. 1, 2013.

Over the next few weeks, beneficiaries can switch their stand-alone Part D prescription drug plan or enroll in one for the first time if they didn't sign up when they were first eligible. They also can join a Medicare Advantage plan, a private health plan that wraps medical and often drug benefits into a single HMO- or PPO-like product. Or they can drop out of a Medicare Advantage plan in favor of original Medicare, the government-sponsored program that doesn't have restricted networks of doctors and hospitals.

"What is daunting to Medicare beneficiaries is the sheer number of private plan options out there," says Fred Riccardi, director of programs and outreach for the Medicare Rights Center, a nonprofit group in New York. "They all have different premiums and copayments and different covered drugs and restrictions on drugs."

Here are five of the costliest mistakes beneficiaries often make during open enrollment, according to experts:

Mistake No. 1: Not bothering to give your current coverage a checkup

The first step is to take stock of what you have. Even if you like your drug coverage, make sure you review your plan's annual notice of change, a letter from the companies that Part D enrollees should have received by now, Riccardi says. "It should say whether a drug that they're taking is no longer covered," he says. "It should specify how their premium is changing or if a pharmacy is leaving the network." If you don't have any drug coverage, now is the time to consider hopping on board. Should you develop a health condition that requires prescription medication, your out-of-pocket costs without insurance could easily overshadow the 1% per month late-enrollment penalty you may accrue for delaying enrollment in Medicare Part D.

Mistake No. 2: Failing to shop around or only considering premium costs if you do

If you pass on seeing what's out there, you run the risk of overpaying for your drugs next year by default. "You really have to look to see that the drugs [you take] are covered at the best possible price," says Katy Votava, founder and president of Goodcare.com, a consulting service focused on Medicare and health-care costs in Rochester, N.Y. At minimum, beneficiaries should compare drug plans every two years because costs often creep up, she says. "People assume drug coverage is more standardized than it is." In fact, drug plans, which you can compare at Medicare.gov, are all over the map in terms of how they structure premiums, deductibles, copays and tiers of coverage. "You could have a $10 a month copay vs. a $40 a month copay. You could have one medication covered for $30 a month and the other not covered at all," Votava says, noting it's possible to save $2,000 to $4,000 just by being in the right plan. In addition to making sure the drugs you need are on the formulary, or list of covered drugs, and that your pharmacy is in the network, see whether plans impose prior authorization, step therapy, quantity limits or other restrictions, Riccardi says. Reasons to shop around include if your medications have cost you a lot in the last year, if premiums are increasing to an uncomfortable level, if you're using a lot of out-of-network care in a Medicare Advantage plan or if you've experienced poor customer service.

It's also easier to find quality plans this year, according to the Centers for Medicare & Medicaid Services, which has beefed up its star ratings system to alert consumers to the best-performing plans and remind those stuck in continuously low-performing ones that they can switch plans. Beneficiaries have 127 four-star or five-star Medicare Advantage plans from which to choose, up from 106 during open enrollment for 2012. And those in original Medicare have 26 high-performing prescription drug plans at their disposal, up from 13 last year.

Mistake No. 3: Failing to account for out-of-pocket maximums

This is the number that tells you how much you could pay in a year before the plan kicks in to cover what's considered catastrophic costs. Read the fine print to understand what the plan does and doesn't count toward its out-of-pocket max. Factoring in worst-case scenarios could save you thousands of dollars if you develop a condition that requires extensive health services or a pricey prescription drug. Then compare plans and do the math. "If you've had a Medicare Advantage plan where all your care providers were in the network and it had a low out-of-pocket max, like $1,700, then most people couldn't get a Medigap [supplemental insurance] plan that would cost less than that," Votava says. Otherwise, going with original Medicare and a Medigap plan to cover out-of-pocket costs might make more sense.

Mistake No. 4: Choosing a Medicare Advantage plan without first checking if your doctors are in network

About one in four Medicare beneficiaries choose a Medicare Advantage plan, which sometimes offer benefits beyond what's included in traditional Medicare. If you're considering a Medicare Advantage plan, remember that this model means seeing out-of-network providers can quickly become a costly proposition for you. Before signing up for this option, call your preferred doctors, specialists and hospitals to verify that they participate in the plan's network. This can get tricky if you travel a lot, spend winters in a different location or get a referral from your primary-care doctor to a specialist who's out of network. The good news is that while plans can add or subtract health-care providers from their networks every year, they can't be so picky about their members, Lipschutz says. "Medicare Advantage plans have to take all comers, with the minor caveat of people with end-stage renal stage."

Mistake No. 5: Assuming retiree health coverage from a former employer is automatically the best deal or misunderstanding how it interacts with Medicare's various parts

Retirees are often loyal to their old employers, says Votava, but their retiree plan may not be the gold standard in terms of value for their money. In some cases, retirees could get better coverage at a lower cost by going with original Medicare and a Medigap plan or a Medicare Advantage plan. A basic rule of thumb is if seniors are spending more than $250 to $300 a month for their retiree coverage, they should shop around, Votava says. "Even people who are paying $200 could be paying $125." Still, the decision of whether to drop retiree coverage can be complex and it's often irreversible, so take your time and seek professional advice if you need it. If you have retiree coverage from a former employer, make sure you follow its rules concerning Medicare Advantage and Part D, says David Lipschutz, policy attorney for the Center for Medicare Advocacy in Washington. Some retiree plans require you to enroll in a Medicare Advantage plan. Some will work with Part D plans while others prohibit you from signing up for a stand-alone drug plan, he says. "Sometimes people will enroll in a Medicare Part D plan and that enrollment might jeopardize their retiree coverage all together," Lipschutz says.

If you need help weighing your options or enrolling in a Medicare plan, there are several free resources you can consult.

• Medicare.gov has a Plan Finder tool that works by plugging in your ZIP Code. Counselors also can assist you by calling 1-800-Medicare (1-800-433-4227.)
• States also run help centers through Shiptalk.org.
• AARP has Medicare enrollment guides in English and Spanish on its website, www.aarp.org.
• You also can call the companies that provide the plans for help understanding their offerings. The Kaiser Family Foundation offers descriptions of how Medicare works on its website, kff.org.

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Copyright © 2012 Dow Jones & Company, Inc. All Rights Reserved.