COLA Driven Tax Changes for 2017

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There are many cost of living adjustments (COLA) being made for 2017 as announced by the IRS. These changes will be effective on January 1, 2017. The changes we will discuss today are those being made under section 415 of the Internal Revenue Code. This Code sets forth dollar limitations on benefits and contributions that are made to qualified retirement plans. Each year, the Treasury reviews these plans and makes necessary changes to the limitations. In general, the COLA increase for 2017 is 1.01% of the defined limitation amounts for 2016

For 2017 the limitation for benefit for a defined benefit plan is raised to $215,000. This increase is slightly higher than the average, being a 1.02% increase. Under provisions made in if a participant separated from service prior to January 1, 2017, their limitation for benefit for a defined benefit plan will be determined by multiplying the participant’s compensation limit, as adjusted through 2016, by 1.0112.%.

Those who participate in a defined contribution plan will see their limitation increase to $54,000. Again, this amount is slightly higher than the average increase, as it is 1.02% higher than the figure used in 2016. The annual compensation limit also increases to $270,000.

If you fall in the category of “key employee” and participate in a top heavy plan, your dollar limitation will increase to $175,000 in 2017. This is a slightly higher adjustment in COLA terms, as it is carries an increase of 1.03% from last year’s figures.

The dollar amount used to determine the maximum account balance in an employee stock ownership plan that is subject to a five-year distribution is increased to $1,080,000, as provided by §409(o)(1)(C)(ii). However, the dollar amount used to determine the lengthening of the five-year distribution period is $215,000 for 2017, which is slightly higher than the average COLA increase, because it is 1.02% higher than the 2016 figure.

Certain qualified individuals that participate in certain governmental plans will have an increase in their yearly compensation amount to $400,000 in 2017.

The Internal Revenue Code also determined that several retirement related amounts would also need to see an adjustment for 2017. The Adjusted Gross Income (AGI) changes to determine retirement savings contribution credit are as follows:

  • Married Filing Joint – $62,000.00
  • Head of Household – $46,500.00
  • Single, Qualifying Widower, Married Filing Separate – $31,000.00

For taxpayers filing a joint return or who are a qualifying widower, and you are an active participant in a qualified plan, the applicable dollar amount used to determine the deductible amount for your IRA contribution is $99,000. For single taxpayers and head of household taxpayers, if you actively participant, the dollar amount used to determine the deductible portion of your IRA contribution is increased to $62,000. If a taxpayer is not an active participant, but their spouse is, the applicable dollar amount is $186,000.

The deduction for taxpayers making contributions to a traditional IRA are phased out as follows, per your Adjusted Gross Income (AGI):

  • Single and Head of Household Filing Status: $62,000-$72,000
  • Married Filing Joint Filing Status: $99,000-$119,000
  • IRA contributor who is not an active participant, but spouse is an active participant: $186,000-$196,000

Adjusted Gross Income (AGI) for determining the maximum Roth IRA contribution for 2017 will be $186,000 for married filing joint taxpayers and also for qualifying widowers. For single and head of household taxpayers, you will see an increase to $118,000.

The phase-out AGI range for taxpayers contributing to Roth IRA accounts has increased to $186,000-$196,000 for married filing joint taxpayers. For single and head of household taxpayers, your AGI phase-out limit will be $118,000-$133,000.

And finally, updated provisions state that the dollar amount used to determine excess employee compensation with respect to single-employer defined benefit pension plan for which the special election has been made increases to $1,115,000.

There has been no increase in provisions for those taxpayers who file married filing separately. This tax status provides you with the least amount of tax credit benefit.

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