Tax laws change every year, and this year is no exception. With the tax season now in full swing, it’s a great time to familiarize yourself with some of the new tax rules that may affect you and your family. Even if you’ve already filed your 2015 return, reviewing some of the changes made this year can help you get a sense of tax trends that will affect Americans for years to come. Here are a handful of changes that will have widespread impact:
Steeper penalties for those without health insurance: Under the Affordable Care Act, those who didn’t have qualifying health care coverage in 2015 and didn’t meet requirements for an exception to the penalty will pay significant penalties this year. And these penalties will increase again next year. If you didn’t have health care coverage in 2014, penalties were only $95 per adult and $47.50 per child under 18 or one percent of household income, depending on which was higher. For the 2015 tax year, these fines increase to $325 per adult and $162.50 per child under 18 or two percent of household income, whichever is higher. However, as in 2014, a set maximum in penalties applies. For more information on Obamacare penalties for 2015, visit http://bit.ly/HealthInsurancePenalties.
There are a few extra days to file: Although the traditional tax filing deadline is April 15, Americans have until April 18 to file this year. This extended deadline is due to Emancipation Day, which commemorates the abolition of slavery in Washington, D.C. and is considered to be a federal holiday for tax-filing purposes. Since the D.C. Emancipation Day will be observed on Friday, April 15, and the government cannot require taxes to be filed on a weekend or holiday, the deadline moves to Monday this year.
As was the case for 2014, the IRS will provide the option to request a 6-month extension for those who need more time to prepare their return and want to avoid a late-filing penalty. However, keep in mind that late-payment penalties and interest on taxes owed will still apply.
Standard deductions will increase slightly: To adjust for inflation, the government is increasing the dollar amount that taxpayers who don’t itemize their deductions on a Schedule A (Form 1040) can use to reduce their taxable income. Singles and married people filing separate returns can take a $6,300 standard deduction for their 2015 taxes (versus $6,200 allowed in 2014) and those who are married and filing jointly can take a $12,600 deduction (up from $12,400 in 2014). To determine your standard deduction, visit the IRS website at http://bit.ly/StandardDeductions.
Less flexibility for IRA Rollovers: In the past, taxpayers who cashed out their IRA had 60 days to redeposit these funds in a retirement account to avoid a taxable event and premature distribution penalty if it applied. In effect, it was a way to borrow money on a short-term basis. But for the 2015 tax year and moving forward, taxpayers are only allowed one indirect rollover from an IRA in a 12-month period. On the other hand, trustee-to-trustee transfers in which funds from an IRA are transferred directly to another IRA or a new employer’s retirement plan can be done as often as one wants.
Pell Grants can now be allocated as living expenses: A form of financial aid for college that does not have to be repaid, a Pell Grant from the federal government is tax-free income if it is spent on qualified education expenses such as tuition, fees, books and supplies. Now that Pell Grants can also be allocated for living expenses; however, they can have more complex tax ramifications for those who use them this way. Pell Grant funds that are used for non-qualified expenses such as room and board count as taxable income. At the same time, taxes owed on Pell Grant money used for living expenses might actually help increase a taxpayer’s ability to claim an education tax credit. Since the way a Pell Grant is distributed has different tax consequences for people depending on their financial situation, it’s a good idea to consult a tax professional for personalized advice on this matter.
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