IRS Announces 2016 Inflation Adjustments to Fringe Benefits, Increase in Qualified Parking Benefit Amount
Author: Rena Pirsos, XpertHR Legal Editor
October 22, 2015
The IRS has announced the 2016 annual cost-of-living adjustments made to several employee benefits and taxable amounts, based on changes to the Consumer Price Index. These are the maximum amounts that may be excluded in 2016 from an employee's taxable income for specific benefits.
Employers should reprogram their computers and payroll systems with these new amounts before the first payroll of the upcoming year to ensure that they are withholding the correct amount of taxes from the pay of employees who receive the benefits.
The following are the general standard deduction amounts for 2016:
- $12,600 for married couples filing jointly or surviving spouses (unchanged from 2015);
- $9,300 for heads of household (increased from $9,250 in 2015); and
- $6,300 for single taxpayers and married taxpayers filing separately (unchanged from 2015).
Under the American Taxpayer Relief Act of 2012 (ATRA), the standard deduction for joint filers/surviving spouses remains at 200% of the standard deduction for single filers.
The personal exemption for tax year 2016 is $4,050 (increased from $4,000 in 2015). Under ATRA, the phase-out of the personal exemption for higher income earners is reinstated and begins at:
- $259,400 of adjusted gross income for singles ($258,250 in 2015);
- $311,300 for married couples filing jointly or surviving spouses ($309,900 in 2015);
- $155,650 for married couples filing separately ($154,950 in 2015); and
- $285,350 for heads of household ($284,050 in 2015).
The personal exemption phases out completely at $381,900 for singles and $433,800 for married couples filing jointly.
Qualified Transportation Fringe Benefits
The following amounts may be excluded from an employee's gross income for employer-provided qualified transportation fringe benefits in 2016:
- Up to $255 per month for qualified parking benefits (increased from $250 in 2015); and
- Up to $130 per month for transportation in a commuter highway vehicle and for any transit pass.
Parity for mass transit benefits, which was extended by ATRA, expired at the end of 2013.
Flexible Spending Account Deferrals
The dollar limitation under Internal Revenue Code (IRC) § 125(i) on voluntary employee salary reductions for contributions to health flexible spending arrangements for plan years beginning in 2016 remains $2,550.
Adoption Assistance Exclusion
Under IRC § 137(a)(2), the amount that can be excluded from an employee's gross income for the adoption of a child with special needs is $13,460 for 2016 (increased from $13,400 in 2015). The same amount is the maximum that can be excluded under § 137(b)(1) from an employee's gross income for the amounts paid or expenses incurred by an employer for qualified adoption expenses furnished under an adoption assistance program for other adoptions by an employee.
The amount excludable from an employee's gross income begins to phase out for employees with modified adjusted gross income (MAGI) exceeding $201,920 (increased from $201,010 in 2015). It is completely phased out for employees with MAGI of $241,920 or more (increased from $241,010 in 2015).
Earned Income Credit
Employers are encouraged to notify employees whose wages for 2016 will be less than $53,505 (increased from $53,267 in 2015) that they may be eligible to claim the earned income credit on their 2016 personal income tax returns. The maximum EIC amount is $6,269 (increased from $6,242 in 2015) for taxpayers filing jointly who have three or more qualifying children.
Medical Savings Account Deferrals
An employee must be covered by a high deductible health plan to be eligible to make contributions to a Medical Savings Account, or for the employer to make the contributions in the employee's behalf. For 2016, a high deductible health plan is defined as a plan with an annual deductible of $2,250 - $3,350 (increased from $2,200 - $3,300 in 2015) for individual coverage, and $4,450 (unchanged from 2015) - $6,700 (increased from $6,650 in 2015) for family coverage.
Maximum out-of-pocket expenses cannot exceed $4,450 for individual coverage and $8,150 for family coverage (both amounts are unchanged from 2015).
Long-Term Care Health Insurance Benefits
For long-term care insurance contracts that make per diem benefit payments, the maximum amount of the payments that is excludable from income in 2016 is $340 per day (increased from $330 per day in 2015).
Foreign-Earned Income and Housing Cost Exclusions
The 2016 maximum foreign-earned income exclusion amount under IRC § 911(b)(2)(D)(i) is $101,300 (increased from $100,800 in 2015). The maximum amount of the foreign housing cost exclusion is $14,112 (increased from $13,888 in 2014).
Pipeline Construction Industry Per Diem Option
In 2016, an eligible employer may pay certain welders and heavy equipment mechanics up to $17 per hour (unchanged from 2015) for rig-related expenses that will be deemed substantiated under an accountable plan, and up to $11 per hour for fuel (unchanged from 2015), when paid in accordance with Revenue Procedure 2002-41, 2002-1 C.B. 1098.