Tax Reform Act Of 1986

Definition of "Tax reform act of 1986"

Written by

Katie & Jessica Bak

Front Gate Real Estate

Legislation to eliminate most tax shelters and write-offs in exchange for lower rates for both corporation and individuals. It was intended to be revenue neutral; that is, to bring in the same amount of revenue as the previous law.

1. For individuals, it eliminated deductions for most tax shelters such as tax-advantaged limited partnerships; it eliminated special treatment for capital gains by taxing them at the same rate as ordinary income.
2. Deductions for an INDIVIDUAL RETIREMENT ACCOUNT (IRA) no longer applied to those with incomes above $35,000 and couples above$50,000 unless they had no company pension plan. Individuals with incomes between $25,000 and $35,000 and couples between$40,000 and $50,000 got a partial deduction.
3. For company-sponsored 401 (k) salary reduction plans, the maximum annual limit was reduced from $30,000 to $7000; antidiscrimination rules were tightened; and a 10% penalty was imposed for withdrawals before age 59/2.
4. Other administrative changes made it more expensive for companies to start or maintain a company pension plan.
5. CASH VALUE LIFE INSURANCE was one of the few retirement vehicles to retain its tax-deferred status.
6. Top individual tax rates were reduced from a series of rates going up to 50% to two rates: 15% and 28%, although the top marginalrate was 33%.
7. The top corporate rate down from 46% to 34%.
8. The investment tax credit was eliminated and depreciation schedules were lengthened.
9. Many industries lost special advantages they held under the old code.
10. The alternative minimum tax was stiffened for individuals and one was added for corporations.