The newly-issued IRS 2017 cost-of-living adjustments have been announced. Some amounts have been increased only slightly while others will remain at 2016 levels. Following is a breakdown of how these new amounts may impact individual income taxes, the Alternative Minimum Tax, education and child-related tax breaks, retirement plans, and gift and estate taxes.
Tax Bracket Threshold Adjustments for Individual Income Taxes
While tax bracket thresholds are increasing for each filing status from the 2017 cost-of-living adjustments, because these brackets are based on percentages, those who fall into the higher tax brackets will experience a more significant increase. For example, whereas the top of the 10% bracket increases by between $50 and $100, depending on filing status, the top of the 35% bracket increases more substantially by jumping from $1,875 to $3,750, also depending on filing status.
The personal and dependency exemption remains unchanged at $4,050 for 2017. However, the exemption is subject to a phase-out, which reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s Adjusted Gross Income (AGI) exceeds the applicable threshold (2% for each $1,250 for separate filers).
For 2017, the phase-out starting points increase by $1,250 to $2,500 to AGI of $261,500 (singles), $287,650 (heads-of-households), $313,800 (joint filers), and $156,900 (separate filers). The exemption phases out completely at $384,000 (singles), $410,150 (heads-of-households), $436,300 (joint filers), and $218,150 (separate filers).
Your AGI may affect some of your itemized deductions, as well. An AGI-based limit reduces certain otherwise allowable deductions by 3% of the amount by which a taxpayer’s AGI exceeds the applicable threshold (not to exceed 80% of otherwise allowable deductions). The thresholds are the same as for the personal and dependency exemption phase-out.
The Alternative Minimum Tax as Indexed for Inflation
The Alternative Minimum Tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others, and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.
Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2017, the threshold for the 28% bracket increased by $1,500 for all filing statuses except married filing separately, which increased by half that amount.
The AMT exemptions and exemption phase-outs are also indexed. The exemption amounts for 2017 are $54,300 for singles and heads-of-households and $84,500 for joint filers, increasing by $400 and $700, respectively, over 2016 amounts. The inflation-adjusted phase-out ranges for 2017 are $120,700–$337,900 (singles and heads-of-households) and $160,900–$498,900 (joint filers). The amounts for separate filers are half of those for joint filers.
Education and Child-Related Tax Breaks
The maximum benefits of various education and child-related tax breaks generally remain the same for 2017, though most of these breaks are also limited based on the taxpayer’s Modified Adjusted Gross Income (MAGI). Taxpayers whose MAGIs are within the applicable phase-out range are eligible for a partial break though breaks are eliminated for those whose MAGIs exceed the top of the range. Married couples filing separately generally aren’t eligible for these types of credits.
The MAGI phase-out ranges generally remain the same or increase modestly via the 2017 cost-of-living adjustments, depending on the break, such as:
The American Opportunity Credit. The MAGI phase-out ranges for this education credit (with a maximum of $2,500 per eligible student) remain the same for 2017 at $160,000–$180,000 for joint filers and $80,000–$90,000 for all other filers.
The Lifetime Learning Credit. The MAGI phase-out ranges for this education credit (with a maximum of $2,000 per tax return) increase for 2017 to $112,000–$132,000 for joint filers and $56,000–$66,000 for all other filers — up $2,000 for joint filers and $1,000 for all others.
The Adoption Credit. The MAGI phase-out ranges for this credit also increase by $1,620 for 2017, taking them up to $203,540–$243,540 for joint, head-of-household and single filers. The maximum credit increases by $110 to $13,570.
These are only some of the education and child-related breaks that may benefit you. Keep in mind that if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible.
Understanding Retirement Plans
Only a few retirement plan-related limits increase from the 2017 cost-of-living adjustments, and the increases are only slight. In other words, you have limited, if any, opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed.
Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phase-out range limits will all increase for 2017.
Traditional IRAs. MAGI phase-out ranges apply to the deductibility of contributions if the taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan.
- For married taxpayers filing jointly, the phase-out range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan, as detailed here:
- For a spouse who participates, the 2017 phase-out range limits increase by $1,000, to $99,000–$119,000.
- For a spouse who doesn’t participate, the 2017 phase-out range limits increase by $2,000, to $186,000–$196,000.
- For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2017 phase-out range limits increase by $1,000, to $62,000–$72,000.
- Taxpayers with MAGIs within the applicable range can deduct a partial contribution while those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.
Still, a taxpayer whose deduction is reduced or eliminated can make non-deductible traditional IRA contributions. The $5,500 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Non-deductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.
Roth IRAs. Whether or not you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute, as follows:
- For married taxpayers filing jointly, the 2017 phase-out range limits increase by $2,000, to $186,000–$196,000.
- For single and head-of-household taxpayers, the 2017 phase-out range limits increase by $1,000, to $118,000–$133,000.
- You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.
Married taxpayers filing separately are subject to much lower phase-out ranges for both traditional and Roth IRAs.
Changes to Gift and Estate Taxes
The unified gift and estate tax exemption and the Generation-Skipping Transfer (GST) tax exemption are both adjusted annually for inflation. For 2017, the amount is $5.49 million (up from $5.45 million for 2016).
The annual gift tax exclusion remains at $14,000 for 2017. It’s adjusted only in $1,000 increments, so it typically increases only every few years with the last increase occurring in 2013.
The 2017 cost-of-living adjustments are trending higher than 2016 amounts, but only slightly. Regarding retirement plan-related limits, only a few increased, and they increased minimally. If you’re interested in finding out how these amounts might affect your tax planning or retirement planning, contact your Untracht Early advisor today.