Investing & Taxes
The American Taxpayer Relief Act of 2012 extended or made permanent many of the tax provisions established from previous legislation. Below, we provide a summary of the provisions most relevant to mutual fund investors.
Federal Individual Income Tax Rates
The income tax rate brackets passed in 2001 are now permanent and include a new rate of 39.6%. The income ranges for each bracket will be indexed for inflation going forward.
- The marriage penalty is permanently repealed for taxpayers in the 10% and 15% income brackets. The standard deduction for married taxpayers in those brackets who are filing jointly is now 200% of single filers.
- The child tax credit for 2016 is $3,000.
- Backup withholding will remain at 28%. Backup withholding generally applies to taxpayers whose Taxpayer Identification number does not match IRS records. It also applies to taxpayers who have under-reported their income. Individuals subject to backup withholding may also be subject to state backup withholding.
Alternative Minimum Tax (AMT)
The Alternative Minimum Tax is a parallel tax system that was created to keep high income individuals from avoiding taxes through various deductions and exemptions.
The exemption amounts are increased as shown below and will be indexed for inflation going forward. This provision is retroactive beginning with the 2012 tax year.
|Filing Status||2016 Exemption Amount||2016 Phase Out Ranges|
|Married Filing Jointly & Surviving Spouse||$83,800||$159,700 - $494,900|
|Married Filing Separately||$41,900||$79,850 - $247,450|
|Single or Head of Household||$53,900||$119,700 - $335,300|
Estate, Gift and Generation Skipping Tax Exemptions
Estate assets are taxed at a top rate of 40% with an exemption limit of $5,430,000 for 2016 (based on share price as of the decedent's date of death, including adjustments). This amount will be indexed for inflation going forward.
Tax-Free Charitable Distributions
Distributions from an IRA to a qualified charity may be made tax-free up to $100,000 per taxpayer, per taxable year. The account owner must be age 70½ or older.
Net Investment Income Tax
The Net Investment Income Tax went into effect on January 1, 2013. The 3.8% Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. Visit www.irs.gov for more information.
In-Plan Roth Conversions
Participants in 401(k), 403(b) or 457(b) Plans can convert any amount in a non-Roth account to a Roth account if the plan permits. The requirement that an account balance can only be converted to Roth if the amount is otherwise distributable is being eliminated. This is a permanent provision, effective for transfers after December 31, 2012.
Coverdell Education Savings Account (CESA) Limits
The annual contribution limit for CESAs is fixed at $2,000. The contribution deadline for this account type is April 15th of the following year.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.