Tax Reform Act of 1986

Written by Fmi.Online Friday November 11, 2022
The Tax Reform Act of 1986 is a tax law approved by Congress in 1986 that performed several changes to the previous tax legislation. It was intended to stimulate economic development within the country by relieving tax burdens from individuals.

Explanation :

This tax reform was pushed by Ronald Reagan’s administration and some congressmen to simplify a previously highly-complex tax system. This newly introduced reform reduced the income tax top rate from 50% to 28% and increased the bottom tax rate from 11% to 15%. It also simplified the way taxes were calculated, to avoid the exploitation of the previous more complex legislation. It eliminated tax shelters and loopholes that unfairly reduced the tax bill of many businesses and wealthy individuals. On the other hand, owning a home became more attractive since the deduction on interest paid through mortgages was increased. Finally, among some other major changes, a new depreciation system was imposed on companies. It was called the Modified Accelerated Cost Recovery System (MACRS), and it established a useful life period for the various types of assets. Many other changes were made to previous tax laws through this reform, which was also known as the Second Reagan Tax Cut.  

In a nutshell :

  • The Tax Reform Act of 1986 was a comprehensive tax reform legislation that was passed into law by President Ronald Reagan.
  • The law effectively lowered the top marginal tax bracket income tax rates while eliminating several loopholes.
  • The 1986 reform was followed up by subsequent bills in 1993 and later.
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