IRS Announces Inflation Adjustments for 2016

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By, Kerry Reilly, Esq.

Income Tax:

  • Highest Tax Bracket for Estates and Trusts. An estate or trust will be subject to the highest income tax bracket and Medicare surtax if taxable income exceeds $12,400 (increased from $12,300 in 2015).
  • Foreign Earned Income Exclusion. For taxable years beginning in 2016, the foreign earned income exclusion amount under §911(b)(2)(D)(i) is $101,300 (increased from $100,800 in 2015).
  • Expatriation to Avoid Tax. For calendar year 2016, under §877A(g)(1)(A), unless an exception under §877A(g)(1)(B) applies, an individual is a covered expatriate if the individual’s “average annual net income tax” under §877(a)(2)(A) for the five taxable years ending before the expatriation date is more than $161,000 (increased from $160,000 in 2015).
  • Tax Responsibilities of Expatriation. For taxable years beginning in 2016, the amount that would be includible in the gross income of a covered expatriate by reason of §877A(a)(1) is reduced (but not below zero) by $693,000 (increased from $690,000 in 2015).

Gift Tax:

  • Annual Exclusion for Gifts. The annual exclusion for gifts remains at $14,000 for 2016.
  • Annual Exclusion for Gifts to Non-Citizen Spouse. The first $148,000 of gifts to a spouse who is not a citizen of the United States shall not be considered a taxable gift by the donor (increased from $147,000 in 2015).
  • Large Gifts Received from Foreign Persons. Gifts from foreign persons in excess of $15,671 in aggregate must be reported to the IRS (increased from $15,601 in 2015).

Estate Tax

  • Unified Credit Against Estate Tax. The basic exclusion amount for an estate of any decedent dying during calendar year 2016 is $5,450,000 (increased from $5,430,000 in 2015).
  • Valuation of Qualified Real Property in Decedent’s Gross Estate. For an estate of a decedent dying in calendar year 2016, if the executor elects to use the special use valuation method under §2032A for qualified real property, the aggregate decrease in the value of qualified real property resulting from electing to use §2032A for purposes of the estate tax cannot exceed $1,110,000 (increased from $1,100,000 in 2015).
  • Interest on Certain Portions of Estate Tax Payable in Installments. For an estate of a decedent dying in calendar year 2016, the dollar amount used to determine the “2-percent portion” (for purposes of calculating interest under §6601(j)) of the estate tax extended as provided in §6166 is $1,480,000 (increased from $1,470,000 in 2015).

See Rev. Proc. 2015-53 for more details.