Tax planning 2017: Inflation adjusted tax numbers
Each year, certain tax figures are adjusted for inflation. While most figures are unchanged versus 2016, there is more than a 7% increase to the maximum earnings subject to social security tax. Take note of these numbers for use in your 2017 planning.
The maximum earnings subject to social security tax in 2017 is $127,200. The earnings limit for those under full retirement age increases to $16,920 for 2017.
The "nanny tax" threshold remains $2,000 in 2017. If you pay household employees $2,000 or more during the year, you're generally responsible for payroll taxes. The "kiddie tax" threshold remains $2,100 for 2017. If you have a child under the age of 19 (under age 24 for full-time students) who has more than $2,100 of unearned income, such as dividends and interest income, the excess could be taxed at your highest tax rate.
The maximum individual retirement account (IRA) contribution you can make in 2017 remains unchanged at $5,500 if you are under age 50 and $6,500 if you are 50 or older.
The maximum amount of wages employees can contribute to a 401(k) plan remains at $18,000, with an additional $6,000 if you are 50 or older. The 2017 maximum contribution for SIMPLE plans is $12,500 and and an additional $3,000 if you are 50 or older.
The maximum you can contribute to a health savings account in 2017 is $3,400 for individuals and $6,750 for families. The catch-up contributaion if you're age 55 or older is $1,000.
The real definition of "dependent" may surprise you
Many people think of a "dependent" as a minor child who lives with you. This is true, but it's important to remember dependents can include parents, other relatives and nonrelatives, and even children who don't live with you.
Exemptions and your taxable income. Each dependent deduction is worth $4,050 on your 2016 and 2017 federal income tax returns. This exemption reduces your taxable income by this amount. You'll lose part of the benefit when your adjusted gross income reaches a certain level. For 2016, the phase-out begins at $311,300 when you're married filing jointly and $259,400 when you're single.
Definition of a dependent. A dependent is a qualifying child or a qualifying relative. While there are specific rules, generally, a dependent is someone who lives with you and who meets several tests, including a support test. For qualifying children, the support test means the child cannot have provided more than half of his or her own support for the year. For qualifying relatives, the support test means you generally must provide more than half of that person's total support during the year.
There are many exceptions. For example, parents don't have to live with you if they otherwise qualify, but certain other relatives do. If you're divorced and a noncustodial parent, your child doesn't necessarily have to live with you for the dependent deduction to apply. Who can't be claimed? Your spouse is never your dependent. In addition, you generally may not claim a married person as a dependent if that person files a joint return with a spouse. Also, a dependent must be a U.S. citizen, resident alien, national, or a resident of Canada or Mexico for part of the year.
For a seemingly simple deduction, claiming an exemption for a dependent can be quite complex. You'll want to get it right, because being able to claim someone as a dependent can lead to other tax benefits, including the child tax credit, education credits, and the dependent care credit. Contact our office to learn who qualifies as your dependent. We'll help you make the most of your federal income tax exemptions.