Tax Reform Act of 1986

Law

1. revised federal tax laws and created the Internal Revenue Code of 1986. The Act eliminated various tax loopholes for high-income earners and reduced the highest rates for both businesses and individuals. The intent of the Act was to achieve a “level playing field.” The rate reductions were to be made up by increased restrictions on deductions for corporate capital expenditures and a repeal of the investment tax credit. Corporate taxes were thus expected to increase $120 billion in five years, which they generally did. The act also removed over four million low-income individuals from the tax rolls and made unemployment compensation taxable. Tax reform took place previously in 1976, 1981, and 1984. The Tax Reform Act of 1976 included, among other changes, new provisions relating to childcare and child support, and instituted new laws relating to capital gains and losses, including the one-time exclusion from capital gains tax on the sale of a residence. In 1981, the Economic Recovery Tax Act (q.v.) was enacted. The Tax Reform Act of 1984 was aimed at reducing the federal deficit. Among its provisions were tax exemptions for certain fringe benefits, stricter rules regarding deductions for charitable donations, and the creation of tax advantages to corporations to encourage exports. These efforts to amend federal tax laws were followed by the sweeping changes brought by the Tax Reform Act of 1986.