On Oct. 30, the IRS issued its cost-of-living adjustments for 2015. While many amounts increased only slightly, others remained at 2014 levels.
Changes for Individual Income Taxes
When it comes to individual income tax brackets, you can anticipate a widening of the brackets and a slight increase in allowable personal exemptions for the coming year. Tax bracket thresholds have increased for each filing status but, because these thresholds are based on percentages, they’ve increased more significantly for the higher brackets. For example, the top of the 10% bracket has increased by $150 to $300, but the top of the 35% bracket has increased by $3,625 to $7,250, depending on filing status, of course. Here’s how it breaks out:
The personal and dependency exemption for 2015 has increased by only $50, to $4,000. It’s important to note that the exemption is subject to a phaseout, 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% of each $1,250 for separate filers).
For this year, the phaseout starting points increase by $2,425 to $4,850, to AGI of $258,250 (singles), $284,050 (heads of households), $309,900 (joint filers), and $154,950 (separate filers). The exemption phases out completely at $380,750 (for singles), $406,550 (for heads of households), $432,400 (for joint filers), and $216,200 (for separate filers).
Your AGI may also affect some of your itemized deductions. 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).
For 2015, the thresholds are $309,900 (up from $305,050 in 2014) for joint filers, $284,050 (up from $279,650) for heads of households, $258,250 (up from $254,200) for singles, and $154,950 (up from $152,525) for separate filers.
What About the Alternative Minimum Tax (AMT)?
The Alternative Minimum Tax 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 2015, the threshold for the 28% bracket increases by $2,900 for all filing statuses except married filing separately, which increased by half that amount.
The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2015 are $53,600 for singles and heads of households and $83,400 for joint filers, increasing by $800 and $1,300, respectively, over the 2014 amounts. The inflation-adjusted phaseout ranges for 2015 are $119,200– $333,600 (for singles and heads of households) and $158,900–$492,500 (for joint filers). (Note: 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 2015. However, most of these breaks are also limited based on the taxpayer’s Modified Adjusted Gross Income (MAGI). Taxpayers whose MAGI is within the applicable phaseout range are eligible for a partial break — breaks are eliminated for those whose MAGI exceeds the top of the range.
The MAGI phaseout ranges generally remain the same or increase modestly for 2015, depending on the break. For example:
• The American Opportunity Credit — The MAGI phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2015 at $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.
• The Lifetime Learning Credit — The MAGI phaseout ranges for this education credit (maximum $2,000 per tax return) have increased for 2015 to $110,000–$130,000 for joint filers and $55,000–$65,000 for other filers — up $2,000 for joint filers and $1,000 for others.
• The Adoption Credit — The MAGI phaseout ranges for this credit have also increased for 2015 by $3,130 to $201,010–$241,010 for joint, headof-household, and single filers. The maximum credit increases by $210 to $13,400 for 2015.
(Note: Married couples filing separately generally aren’t eligible for these credits.)
These are only some of the education and child-related tax 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, him or herself, might be eligible.
Many retirement plan-related limits have increased slightly in 2015 so you may have opportunities to increase your retirement savings.
Your MAGI may reduce, or even eliminate, your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits have all also increased for 2015.
As follows, MAGI phaseout 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 phaseout range is specific to each spouse based on whether he or she is a participant in an employersponsored plan.
• For a spouse who participates, the 2015 phaseout range limits have increased by $2,000 to $98,000–$118,000.
• For a spouse who doesn’t participate, the 2015 phaseout range limits have also increased by $2,000 to $183,000–$193,000.
• For single and head-of-household taxpayers participating in an employersponsored plan, the 2015 phaseout range limits have increased by $1,000 to $61,000–$71,000.
Taxpayers with MAGI within the applicable range can deduct a partial contribution; those with MAGI exceeding the applicable range can’t deduct any IRA contribution.
However, 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.
Participating 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.
• For married taxpayers filing jointly, the 2015 phaseout range limits have increased by $2,000 to $183,000–$193,000.
• For single and head of household taxpayers, the 2015 phaseout range limits have also increased by $2,000 to $116,000–$131,000.
You can make a partial contribution if your MAGI falls within the applicable range but you aren’t eligible to make a contribution if it exceeds the top of the range.
(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)
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 2015, the amount is $5.43 million (up from $5.34 million in 2014).
The annual gift tax exclusion remains at $14,000 for 2015. It’s adjusted only in $1,000 increments so it typically increases only every few years.
The Bottom Line: Can You Expect Tax Relief, Coming Soon?
With the 2015 cost-of-living adjustment amounts trending slightly higher, you have an opportunity to realize a little bit of tax relief this coming year. Additionally, with many retirement plan-related limits also increasing, you may have the chance to boost your retirement savings.
If you have questions on the best tax saving strategies to implement based on the 2015 numbers listed here, please contact your Untracht Early advisor so that we can discuss with you your individual situation and the tax saving opportunities inherent in it.