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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.
Taxation of Capital Gains and Dividends
Long-term capital gains rates are now permanent. The five-year capital gain rate that was effective prior to 2001 has been repealed.
Qualified Dividend income is now permanent, and will be taxed at the long-term capital gain rates.
* Taxpayers with an MAGI over $250,000 (joint) or $200,000 (single) will have the additional 3.8% surtax on investment type income (net investment income, including interest, dividends and capital gains).
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.
Estate, Gift and Generation Skipping Tax Exemptions
Estate assets are taxed at a top rate of 40% with an exemption limit of $5,250,000 for 2013 (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 charity may be made tax-free up to $100,000 per taxpayer, per taxable year. The account owner must be age 70½ or older. The legislation extends this provision until the end of 2013 and is retroactive for 2012.
In addition, the provision contains a transition rule under which an individual can make a rollover during January of 2013 and have it count as a 2012 rollover. Individuals who took a distribution in December of 2012 will be able to contribute that amount to a charity and count it as an eligible charitable rollover to the extent it otherwise meets the requirements for an eligible charitable rollover.
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.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.