'Tis the season : FAQs for tax preparers

Local financial planner Hans Scheil, CFP® details changes we need to be aware of when submitting 2016 tax returns

NSJ: What, if any, changes in the tax code should we be aware of at the state and/or federal level?

Hans Scheil, CFP®: North Carolina personal income tax almost mirrors Federal Income tax for itemized deductions. For single North Carolina taxpayers who do not itemize deductions, the standard deduction increases to $8,250 on their North Carolina state income tax return. For married North Carolina taxpayers filing jointly, the number is double that at $16,250. These numbers were $7,500 and $15,000 in 2015.

Federal tax filing has many minor changes from 2015 to 2016:

* Tax brackets have been increased by about .4% to account for “bracket creep” caused by inflation. This has the effect of slightly lowering actual taxes paid.

* The personal exemption has increased by $50 to $4,050 for each person you claim as a deduction

* For those who deduct car expenses and use the standard mileage deduction, the mileage rate has gone down from 57.5 cents per mile in 2015 to 54 cents per mile in 2016. If one drives 20,000 miles per year for business, this reduces their deduction by $700.

* The Federal standard deduction for singles who don’t itemize deductions in $6,350 (up $50) and $12,700 (up $100) for married filing jointly.

* Tax penalties related to Obamacare for those who choose not to have qualifying health insurance are up in 2016. $695 per adult in 2016 vs $295 per adult in 2015. The family maximum has increased to $2,085 in 2016, up from $975 in 2015. President signed an executive order instructing the IRS not to reject tax returns of those who don’t pay the penalty. IRS.gov indicates that they are still reviewing the order. Consult your tax preparer for advice on this one.

* The exemption from the alternative minimum tax (AMT) has increased $300 to $53,900 for singles and $500 to $83,800 for joint filers. The AMT is designed to tax those who benefit too much from large itemized deductions or tax free interest like municipal bonds.

NSJ: How will major life events and changes in my personal life affect my taxes?

HS: There are many life events that can affect your taxes: a birth or adoption, change in marital or job status, relocating. These life events can either add to your tax bill or alleviate some of what you pay through deductions or tax credits. Just make sure to include any changes in your filing.

NSJ: Should I have my employer make adjustments to my withholdings?

HS: I have found that many taxpayers look forward to both a NC and Federal tax refund each spring, but know that a large refund actually indicates that you over paid your taxes through employer withholding throughout the year. This amounts to giving the government an interest free loan and is not considered to be good financial planning.

For example – If you consistently receive federal and state refunds totaling $2,400 each year, It could be wise to change your withholding with your employer through a new W-4 form so your refund would be zero at the end of the year. This would increase your spendable income by $200 each month throughout the year. The problem here is most people will spend that money throughout the year. A larger tax withholding seems to work like a forced savings plan, however, you get no interest on your savings and your money is not working for you. If you change your withholding and receive extra money each month consider using that money for future by maxing out your 401k or 403b contributions at work or consider setting up an IRA and put the $200 per month into that.

Hans E. Scheil, CFP®, is CEO of North Carolina-based Cardinal Retirement Planning, Inc. and the author of “The Complete Cardinal Guide to Planning for and Living in Retirement.”


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