Ben Franklin once famously said that two things in life were certain: death and taxes. For some the former might be preferable when compared to the never-ending litany of rules, regulations, changes, updates, and general confusion that are part and parcel of the latter.
No one enjoys tax season, but since its arrival is inevitable you may as well get ahead of the curve. Familiarizing yourself now with the 2016 tax rates and tax brackets that you’ll need for filing next April will give you a head start come next Spring. The more you know about these figures the better prepared you can be to get the greatest refund from Uncle Sam. Well then, maybe this tax stuff isn’t so painful after all!
The seven rate brackets under the Federal income tax are as follows: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The amount any one taxpayer owes can be determined by their filing status and level of taxable income earned for the previous year. Any income earned within one of these brackets is taxable under that rate.
Below are the most recent tax tables as determined by the Internal Revenue Service and should serve as a way to estimate how much you may owe, or might be owed, when you file for 2016. These are merely a guideline for all taxpayers, your present situation may require a more comprehensive accounting of your tax liability. This is particularly true if you experience any significant life changes.
Qualifying changes might be getting married, having a child, buying a home, or you earn more money this year. For those taxpayers, withholding claims and estimated taxes may change in some small measure or shift drastically depending on the scope of changes you’ve made in your life since the last tax cycle.
Without further ado, here are the 2016 tax rates from the Internal Revenue Service.
2016 Federal Income Tax Rates
Single Filer Taxable Income Tax Rate
$0 to $9,275 taxed at 10%
$9,276 to $37,650 taxed at 15%
$37,651 to $91,150 taxed at 25%
$91,151 to $190,150 taxed at 28%
$190,151 to $413,350 taxed at 33%
$413,351 to taxed at 35%
$415,051 or more taxed at 39.6%
Married Filing Jointly or Qualifying Widow(er) Taxable Income Tax Rate
$0 to $18,550 taxed at 10%
$18,551 to $75,300 taxed at 15%
$75,301 to $151,900 taxed at 25%
$151,901 to $231,450 taxed at 28%
$231,451 to $413,350 taxed at 33%
$413,351 to $466,950 taxed at 35%
$466,951 taxed at 39.6%
Married Filing Separately Taxable Income Tax Rate
$0 to $9,275 taxed at 10%
$9,276 to $37,650 taxed at 15%
$37,651 to $75,950 taxed at 25%
$75,951 to $115,725 taxed at 28%
$115,726 to $206,675 taxed at 33%
$206,676 to $233,475 taxed at 35%
$233,476 or mortared at 39.6%
Head of Household Taxable Income Tax Rate
$0 to $13,250 taxed at 10%
$13,251 to $50,400 taxed at 15%
$50,401 to $130,150 taxed at 25%
$130,151 to $210,800 taxed at 28%
$210,801 to $413,350 taxed at 33%
$413,351 to $441,000 taxed at 35%
$441,001 or more taxed at 39.6%
Estates and Trusts Taxable Income Tax Rate
$0 to $2,550 taxed at 15%
$2,551 to $5,950 taxed at 25%
$5,951 to $9,050 taxed at 28%
$9,051 to $12,400 taxed at 33%
$12,400 or more taxed at 39.6%
Those of you who follow tax law will notice that the marginal tax rates have mostly stayed unchanged since the 2015 filing year, with 39.6% remaining the highest bracket. Though the tax bracket ranges shifted towards an increase, taxpayers that see no increase in their income will be taxed at a lower marginal tax rate.
A Word About Your Tax Bracket
It’s important to keep in mind that these brackets are only applicable to taxable income, not gross. Remember to account for any deductions that may apply to your financial situation. These can include any donations to charity, interest on your mortgage, property taxes, retirement plan contributions, and so on. If you want to find the most accurate estimate of your 2016 taxes then subtract these figures from your total income earned before you explore these tax rate tables.
While you may earn a salary that would seem to put you in a 25% tax bracket, for example, that doesn’t mean that all of your income is taxed at that amount. As a single filer, your first $9,275 is taxed at just 10%, any income earned between $9,276 and $37,650 is taxed at 15%, and only income earned above and beyond $37,650 is taxed at the 25% rate. The resulting percentage of your income that you actually pay is known as your effective tax rate.
Using these tables to determine your tax bracket will also help you determine the correct number of deductions to take from your paycheck every pay period. Starting now on calculating if you owe, and how much, will ease the pain of writing that check to the government next April. You may even be pleasantly surprised that you’ll have a refund coming instead!
Exemptions and Deductions
Just as the tax rates and brackets have been updated, so too have the personal exemptions and standard deductions that taxpayers can claim for 2016. The Personal Exemption Amount has risen by an additional $50 from last year. Phaseouts now apply under recent updates to the tax law, beginning at an adjusted gross income of $259,400 or $311,300 for a married couple filing a joint return. The exemption phases out entirely at an adjusted gross income of $381,900 or $433,800 for a married couple filing jointly.
The table below reflects the Personal Exemption Phaseout ranges for 2016:
Individual $259,400 to $381,900
Head of Household $285,350 to $407,850
Married (Separate Filing) $155,650 to $216,900
Married (Joint Filing) $311,300 to $433,800
Additionally, the Alternative Minimum Tax (AMT) is no longer a pressing concern for Congress since they voted to permanently adjust this exemption for inflation as part of the American Taxpayer Relief Act of 2012. Up until the vote, Congress would just patch the issue and kick the can down the road for the next tax year when it would be matter for solving yet again. Now the AMT adjusts annually and the exemption amounts have been updated for 2016.
The table below reflects the AMT amounts for 2016:
Head of Household $41,900
Married (Joint Filing) $83,800
Estates and Trusts $23,900
The Standard Deduction Amount has also been raised by $50, but only for taxpayers filing as head of household. For everyone else, it remains the same at $6,300 for single and married couples filing separately and $12,600 for married couples filing a joint return. There is an additional deduction for those taxpayers who are aged or blind at $1,250 and it increases to $1,550 if a taxpayer is also unmarried and not a surviving spouse.
The table below reflects the changes for Standard Deduction rates for 2016:
Head of Household $9,300
Married (Separate Filing) $6,300
Married (Joint Filing) $12,600
Surviving Spouse $12,600
Many filers decide to itemize their deductions. These individuals will want to know this year’s Pease Limitations which cap or entirely eliminate specific deductions for those taxpayers who are nestled comfortably in higher tax brackets. In the event that Pease Limitations apply to your financial situation, then the total of your itemized deductions will be reduced by the lesser of two standards: either 3% of the Adjusted Gross Income (AGI) above the applicable threshold within your applicable filing status or 80% of the total of all your itemized deductions applicable for the tax year.
The Pease Limitations are applicable to a number of itemized deductions including charitable donations, state and local tax deductions, home mortgage interest and a list of other miscellaneous itemized deductions. The limitations are not in effect for investment expenses, gambling losses, a list of particular theft and casualty losses or medical costs.
As for those medical costs, the minimum deduction is still set at 10% of AGI for the majority of filers, with the exception of those over the age of 65 who may claim 7.5% for the 2016 tax year. This is the last year for eligibility, however, as the minimum will rise to 10% for those filers next year.
The table below reflects Pease Limitations on eligible taxpayers for 2016:
Head of Household $284,050
Married (Separate Filing) $154,950
Married (Joint Filing) $309,900
Additional Tax Credit Adjustments for 2016
Tax rates and brackets aren’t the only portions of the tax code that have undergone some changes for the 2016 filing year. There are a number of other tax credit thresholds and phaseouts that have been adjusted and all taxpayers should be aware of these recent modifications. If these credits apply to you then you will find some valuable information for determining your tax responsibility.
Earned Income Tax Credit (EITC)
The EITC has been implemented to help people of low to moderate income levels when tax time arrives. In order to qualify for the credit, a taxpayer must be earning an income by either working for an employer or running their own business or farm. Filers with children must abide by specific rules of the credit if their child does not qualify under the EITC stipulations or if they have a child that meets all of the requirements for EITC eligibility. As for the qualifications, there are earned income and AGI minimums for certain filing statuses and the number of qualifying children claimed for the credit.
For those filing as single, head of household, or widowed then taxable income limits must be lesser than: $14,880 for zero children, $39,226 for one child, $44,648 for two, and $47,995 for three or more children. If you file jointly as a married couple then the numbers change: $20,340 for zero children, $44,846 for one child, $50,198 for two, and $53,505 for three or more qualifying children. The maximum EITC amount available for taxpayers in 2016 are as follows: $506 with no qualifying children, $3,373 with one child, $5,572 for two children, and the full amount possible by law is $6,269 for taxpayers with three or more qualifying children.
Child and Dependent Care Credit
This credit can be used for the costs of care associated with a qualifying child or other individual so that a parent or guardian may work or search for employment. For 2016, the limit on such expenses that are eligible for the credit is $3,000 for one qualifying child or person and $6,000 for two or more qualifying children or individuals.
These figures are the amount of your costs for care – not what you will receive under the credit. In order to estimate how much you would receive for the credit, the amount is equal to anywhere from 20-35% of your qualifying expenses. Your adjusted gross income will determine the percentage used for calculating your credit amount.
Adoption Tax Credit
Much like the Child and Dependent Care credit, the Adoption Tax credit also gives money back towards expenses incurred during the adoption process. Eligible costs include adoption fees, court costs and attorney fees, traveling expenses (which also allow for meals and lodging), and any additional costs directly related to an adoption. Since 1997, when the credit was established, it has been a necessary and invaluable resource to help adoptive parents give a child a loving home.
The maximum amount of credit that parents may claim is adjusted each year. The method by which to calculate a credit is determined using the amount equal to all of the costs that were incurred for the adoption and how much tax is owed by the parents for that year. The credited amount may then be deducted from any tax monies that are owed.
Much like with most other credits, exemptions, and deductions, there are thresholds and phaseouts associated with each taxpayer’s specific income. With the Adoption Tax credit in particular, an income cap has been applied which limits the amount an adoptive parent or family can claim on the credit based on how much money the parents have made for the year.
For 2016, the income cap has been set at $201,920. This means that adopting parents who earn less than this amount in federal taxable wages are eligible to redeem the full credit. If they make anywhere between $201,920-$241,920 then they can take a reduced credit, while anything above $241,920 means they receive no money under the credit. The maximum amount allowed under the Adoption Tax credit is $13,460 based on qualifying adoption expenses.
For adoptive parents of a special needs child, the maximum credit is automatically allowed, whether or not the parents have incurred that much in expenses. There are strict stipulations, however. Under the Adoption Tax credit regulations, the full amount is given almost exclusively to children adopted through foster care. If a child has been given adoption assistance or a subsidy from a state or county government body, then they are deemed a “special needs” child, at least where the tax credit is concerned.
This assistance does not necessarily have to come in the form of a monthly payment. Rather, families can also qualify for the full credit through reimbursement of one-time adoption expenses or Medicaid subsidies received from an adoption assistance program. The credit is not eligible for special needs children that are adopted from another country, nor adopted outside of the foster care system here at home.
One important factor to keep in mind is not every child adopted through foster care is going to qualify for this credit. Step parent adoptions are also ineligible for the Adoption Tax credit.
Hope Scholarship Tax Credit
The Hope Scholarship Tax credit is a benefit given to taxpayers for expenses incurred over the first four years of a postsecondary education. As with all of the other credits and deductions listed, there are certain qualification requirements that must be met in order to claim the amount of the benefit. These costs include tuition, course materials, and many other similar expenditures.
Eligibility for filers to receive this credit is determined only if you meet all three of these requirements: you paid qualifying tuition and other expenses for the first four years of attendance in a learning institution; you paid expenses for a qualifying student; and the eligible student is you, your spouse, or a dependent that you can claim on your taxes.
For 2016, the credit amount remains the same as it had been in previous years, with an amount equal to 100% of qualifying expenses limited to $2,500. There are some income phaseouts applicable for single filers who make over $80,000 and joint filers who have an income of more than $160,000.
The Lifetime Learning credit is another education-related credit that taxpayers may claim for expenses incurred from pursuing an education. The three eligibility requirements as the Hope Scholarship credit apply as to paying the expenses for a qualifying student that is either you, your spouse, or a dependent, and the maximum amount that can be collected is $2,000.
The qualifying student doesn’t need to be pursuing a degree, either. There are income limits of $65,000 for single filers and $130,000 for joint returns and the credit is available for as many years as you may find yourself eligible. It is unlimited and available for all years spent obtaining a postsecondary education as well as courses to help train an individual to find steady employment.
Withholding from Your Wages
When you work, you earn an income. For regular full time or part time employees that earn a W2, your employer will withhold taxes on eligible income from each paycheck. That income isn’t just your hourly or weekly wage, it also includes other compensations like commission, vacation pay, and any bonuses you may be eligible to receive. Basically any financial benefits provided to you by your employer in exchange for your work is considered income, and therefore taxable.
In order to limit the amount in taxes you’ll owe at the filing deadline, and to ensure the government receives its share of taxes throughout the year, employees pay estimated taxes through payroll deductions based on certain unique factor. The most consequential factors that determine your payroll deductions include how much you earn and the personal information that you provided on your W-4 form.
The W-4 is a required federal form and asks for simple personal information as well as allowances that you claim. Those allowances will determine how much money is withheld from each paycheck. If you do not submit a W-4 then the maximum amount will be taken from your check, which is the same as if you claimed no allowances and are single.
The more allowances you claim on the form, the less money will be taken out for tax withholdings (and therefore the more money you’ll see in your bank account). Be careful here, however. Claiming more allowances than you have a right to claim could mean you owe more money at the end of the tax year and you could be subject to an underpayment penalty as well.
Of course, new things happen in our lives all time time; we get married, have kids, buy a house. These life changes can alter your allowances and withholding. If you experience an applicable change in circumstances, then you may want to complete a new W-4 for your employer to reflect your situation so that they can make the proper adjustments of your tax withholdings. The tax rates and brackets that have been updated will help give you an idea of what you owe based on the income you make and the money that has been withheld from you for the year.
Regardless of how many allowances you claim, you’ll have to pay your fair share of taxes one way or another. If you underestimate your tax liability on your W4 form, then you’ll have a bigger bill to pay come April 15. However, if you overestimate your tax liability and have more income withheld for tax purposes then you owe, you will receive a rebate next Spring. Carefully consider your monthly budget and personal philosophy (would you rather over pay and get a rebate or hold on to extra cash each month at the risk of a big tax bill?) regarding federal income taxes before completing your W4.
Our Final Thoughts
Taxes can be a maddening and complex affair, but they are mandatory nonetheless. These new updates to the tax code should serve to make this annoying time of the year a little less complicated. But just be aware that once you file your taxes next April, these rates, brackets, deductions, and credits may all undergo more updates and adjustments yet again. So don’t expect these figures to stay the same year in and year out. The tax laws are constantly changing, so it’s best to be up to date ahead of time, well before it’s time to file.