The IRS has released its annual inflation adjustments to the tax tables and to many other important tax items. Congress mandates inflation adjustments to some tax items, including the gift and estate tax exclusions, the alternative minimum tax exemption, and the income threshold for limits on itemized deductions. The 2017 tax brackets are up slightly from 2016, but some tax limits have not changed. Even incremental changes become important over time because without them, we have slow and steady bracket creep.
Here are the new numbers for 2017:
• The 39.6% Tax Bracket. The top rate kicks in at taxable income of $418,400 for single taxpayers and at $470,700 for married taxpayers filing jointly. The 2016 amounts were $415,050 for singles and $466,950 for married couples.
• Standard Deduction. The standard deduction for heads of household rises $50 to $9,350 for tax year 2017. The other standard deduction amounts for 2017 are $6,350 for singles and $12,700 for married couples filing jointly. The 2016 amounts were $6,300 for singles and $12,600 for married couples filing jointly.
• Limitation on Itemized Deductions. Itemized deduction amounts are limited for some high-income taxpayers. In 2017, the limitation on itemized deductions begins with adjusted gross income (AGI) of $261,500 for singles and $313,800 for married couples filing jointly.
• Personal Exemption. The personal exemption for tax year 2017 remains the same as for 2016, at $4,050. However, the exemption phase-out is slightly increased, beginning with AGI of $261,500 ($313,800 for married couples filing jointly). It phases out completely at $384,000 ($436,300 for married couples filing jointly).
• AMT Exemption. The Alternative Minimum Tax exemption amount will be $54,300 and will begin to phase out when AMT income reaches $120,700 for single taxpayers. The exemption for married couples is $84,500, and their exemption begins to phase out at $160,900. Also for tax year 2017, the 28 percent tax rate applies to taxpayers with taxable incomes above $187,800.
• Estate Tax Exclusion. For decedents who die in 2017, the basic estate tax exclusion amount will be $5,490,000, up from $5,450,000 in 2016. That’s a $40,000 increase.
• Annual Gift Tax Exclusion. The gift tax annual exclusion for 2017 remains $14,000 per donee but is increased to $149,000 for gifts to a non-U.S. citizen spouse.
• Foreign Earned Income Exclusion. For taxable years beginning in 2017, the foreign earned income exclusion amount is $102,100.
The complete Revenue Procedure 2016-55 listing all adjustments is available here.
Pension Plan Limits
Only minor changes affecting pension and other retirement plans are in effect for 2017.
• The Contribution Limit for 401(k)s, 403(b)s, and most 457 plans remains at $18,000.
• IRA contributions remain capped at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains at $1,000.
• Phase-out of IRA Deduction – No workplace plan. For an IRA contributor who is not covered by an employer plan but who is married to someone who is, the deduction is phased out if the couple’s modified AGI is between $186,000 and $196,000, up $2,000 from 2016. If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the IRA deduction do not apply, and the full deduction is allowed.
• IRA Deduction – Workplace Plan. Up slightly, the 2017 IRA deduction phases out at modified AGI of $62,000 to $72,000 for singles covered by a workplace plan. For married couples filing jointly, the income phase-out range is from $99,000 to $119,000 for the spouse covered by a workplace retirement plan.
• Roth IRA Contribution Phase-out. The 2017 AGI phase-out range for taxpayers making contributions to a Roth IRA is $186,000 to $196,000 for married couples filing jointly, up $2,000 from 2016. For singles and heads of household, the income phase-out range is $118,000 to $133,000, again up $1,000.
• The annual compensation limit used to compute employer contributions in increases to $270,000, up $5,000 from 2016.
To see the complete list of retirement plan changes, click here.
Social Security Wage Base
Under Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) program, the amount of earnings subject to taxation is limited each year. The same annual limit also applies when those earnings are used in a benefit computation. This limit changes each year based on inflation. For earnings in 2017, this base is $127,200, up from $118,500 in 2016. When a taxpayer reaches this income amount, social security tax is no longer withheld.