Moneyzine
Contents
/Personal Finance/Tax Reform Act of 1986 (TRA 86)

Tax Reform Act of 1986 (TRA 86)

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
September 25th, 2023
Advertiser Disclosure

Definition

The term Tax Reform Act of 1986 refers to a law that attempted to simplify the federal income tax code and eliminate loopholes. The Tax Reform Act of 1986 was the second of two tax cuts during the Reagan administration, with the most notable change being the lowering of the top tax bracket from 50% to 28%.

Explanation

Also known as TRA 86, the primary objective of the Tax Reform Act of 1986 was to simplify federal income tax law. At the time, TRA 86 was considered the most significant change to tax law in over 50 years. Several of the highlights of the new tax code included:

Individuals

  • Tax Brackets: the total number of tax brackets was reduced from fifteen to three, with the top tax rate declining from 50% to 28%, while the lowest rate increased from 11% to 15%.

  • Dependents: Social Security numbers were now required for all children claimed as dependents.

  • Capital Gains: the exclusion for income derived from long-term capital gains was eliminated; effectively treating such gains as ordinary income.

  • Individual Retirement Accounts: retained the $2,000 annual contribution limit, but phased out the deductibility of contributions for households based on income, if also covered by a pension plan at work.

  • Consumer Debt: loans such as interest payments on credit card debt were no longer deductible.

  • Passive Losses: deductions for business losses associated with passive activities were phased out.

Corporations

  • Tax Brackets: the top tax rate was reduced from 46% to 34%, while the lowest rate for businesses with less than $100,000 in income was 15%.

  • Alternative Minimum Tax (AMT): income subject to AMT was expanded to include a portion of economic income that had been excluded.

  • General Utilities Doctrine: the allowance for certain tax-free distributions of corporate assets as part of a liquidation was repealed.

Related Terms

Related Content

How to Make a Million Dollars in 10 Years
Truthfully, this title should actually be “How to Make a Million Dollars in 10 Years Without Going Into Debt", but that is just getting a little too winded for my liking. It’s true though!
March 26th, 2024
How to Apply Maslow’s Hierarchy to Your Money This Year
You might vaguely remember your psychology teacher talking about Maslow. He pointed at a picture of a triangle as you nodded off in the back of the school room.
March 27th, 2024
How to Tackle Multiple Savings Goals
When there’s only so much money to go around, there are often multiple savings goals competing for your money. Think of the young professional who’d like to get a more reliable car, buy a house, and save for retirement. Or consider the young family that’s saving for college, retirement, and a bigger house.
March 22nd, 2024
The Countdown to Early Retirement: 10 Expenses to Eliminate
Dreaming of waving goodbye to the daily grind five years ahead of schedule? The road to early retirement is paved with more than good intentions; it requires a meticulously crafted strategy with surprising twists. It's not solely about what you should be doing—like diligently saving a portion of your income or investing wisely—but also about what you need to stop doing.
March 22nd, 2024
What’s Your One Page Financial Plan? Mapping out Your Future
“What’s your one page financial plan?” — This is the absolute best question that I’ve heard asked in a long time. Instead of talking about your hot stock pick or your fancy investment that shields you from paying taxes, I think it’s time for all of us to step back and ask ourselves the most intelligent question of all, “Why the heck do I care about money anyway??”
March 14th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.