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Taxpayer Relief Act of 1997

Order Dreyfus' guide:Understanding the New 1997 Tax Act
President Clinton signed the "Taxpayer Relief Act of 1997" into law on August 5, 1997. This major new tax legislation contains a number of provisions of interest to mutual fund investors, including provisions that lower the top tax rate for long-term capital gains. In addition, for many investors, this new law expands the benefits of establishing and maintaining an individual retirement account ("IRA") by providing for:
Increased eligibility for deductible contributions to traditional IRAs; Increased eligibility for deductible contributions to Spousal IRAs;
Penalty-free IRA withdrawals from all IRAs for first-time home buyers and qualified higher education expenses; and
The creation of two new types of IRAs known as:
1) "Roth IRAs" for qualified individuals that provide for nondeductible contributions and tax-free withdrawals under certain circumstances; and
2) "Education IRAs" for qualified individuals that allow for nondeductible contributions for children under age 18 and tax-free withdrawals for qualified higher education expenses.
INDIVIDUAL RETIREMENT ACCOUNTS
(Effective for tax years beginning on or after January 1, 1998)
Increased Eligibility for Deductible Contributions to a Traditional IRA
Current income limits for fully-deductible IRA contributions will be increased gradually and will double over the next 10 years. For individuals, the current income limit of $25,000 will increase to $50,000 by the year 2005. For couples, the current income limit of $40,000 will increase to $80,000 by the year 2007.
Increased Eligibility for Deductible Contributions to a Spousal IRA
For couples with adjusted gross income up to $150,000, fully-deductible contributions of up to $2,000 per year can be made to a Spousal IRA for a non-working spouse regardless of whether the working spouse is an active participant in a qualified retirement plan.1
1 Deductible contributions are phased out for couples having adjusted gross income between $150,000 and $160,000.
Penalty-Free IRA Withdrawals for First-Time Home Buyers and Qualified Higher Education Expenses
For taxable distributions made after December 31, 1997 from an IRA (including a Roth IRA as described below), the additional 10% early withdrawal penalty will not apply if the distributions are made for:
- a first-time home purchase (limited to distibutions up to $10,000); or
- qualified higher education expenses.
Roth IRA (New IRA)
For taxable years beginning on or after January 1, 1998, nondeductible contributions of up to $2,000 annually can be made to a Roth IRA. The ability to contribute to a Roth IRA is phased out, however, for individuals with adjusted gross income between $95,000 and $110,000, and for couples with adjusted gross income between $150,000 and $160,000. The maximum total annual contributions an individual may make to all IRAs (including a Roth IRA) is capped at $2,000. Contributions to a Roth IRA (but not a traditional IRA) may even be made after reaching age 70 1/2.
Withdrawals from a Roth IRA are exempt from Federal taxation if:
- the Roth IRA has been open at least 5 years; and
- the withdrawals are made either:
- on or after the account holder attains age 59½ or becomes disabled; or
- to a beneficiary on or after the death of the account holder; or
- by a first-time home buyer (limited to withdrawals up to $10,000).
- An individual with adjusted gross income of less than $100,000 (other than a married individual filing a separate return) can convert an existing traditional IRA into a Roth IRA. All or a portion of the amount converted (depending on whether contributions to the existing IRA were deductible or nondeductible) will be includable in gross income, but will not be subject to the additional 10% early withdrawal penalty. If the conversion is made before January 1, 1999, the amount converted that is subject to tax will be taxable ratably over four years.
- Education IRA (New IRA)
- For taxable years beginning on or after January 1, 1998, annual nondeductible contributions of up to $500 per child under the age 18 can be made by couples with incomes up to $150,000 or individuals with incomes up to $95,000.
- Contributions to an Education IRA can be made in addition to contributions to a traditional IRA and/or a Roth IRA.
- Distributions used to pay for qualified higher educational expenses are not subject to Federal income tax.
LOWER TAX RATE ON LONG-TERM CAPITAL GAINS
- The top tax rate on long-term capital gains for individual taxpayers is lowered from 28% to 20%. For individuals in the 15% tax bracket, the top tax rate on long-term capital gains is lowered to 10%. The new law also changes the rules governing the holding period for long-term capital gains treatment. Prior to enactment of the new tax law, gains were treated as "long-term" if the assets sold were held for more than one year. Under the new law, assets sold on or after July 29, 1997 will qualify for long-term capital gains treatment if held for more than 18 months, rather than one year.
- The new tax rates on long-term capital gains are retroactive to May 7, 1997, i.e., long-term capital gains on securities sold on or after May 7, 1997 qualify for the new rates if the securities were held for more than 18 months (12 months if the securities were was sold on or after May 7, 1997 but before July 29, 1997).
- For securities sold on or after July 29, 1997 that were held for more than one year but not more than 18 months, the current maximum rate or 28% will continue to apply.
- For securities acquired after December 31, 2000 and held for more than 5 years, the maximum tax rate on long-term capital gains will be an even lower 18% (8% for individuals in the 15% tax bracket).
To speak with a Dreyfus Representative about the above information or to request Understanding the New 1997 Tax Act, a guide that will supply you with critical information about the new tax legislation changes, call 1-800-872-5466 ext. 8066.
NOTE: This above summary is based upon a current interpretation of the new tax law. It is general in nature and is not intended to constitute advice on how the new tax law may affect you personally. Please consult your own tax advisor for advice on your particular situation.
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