Tax Reform Act Of 1986

The Tax Reform Act of 1986 constituted a major overhaul of the U.S. income tax system. Key provisions in the Tax Reform Act of 1986 included the elimination or alteration of several deductions, a reduction in the number of tax brackets, and limitations on real estate tax shelters. Among the deductions repealed by the Tax Reform Act of 1986 were those for two-earner married couples, local and state sales taxes, and attendance at investment seminars. Among the deductions limited by the Tax Reform Act of 1986 were those for IRA contributions, out-of-pocket medical expenses, and business meal and entertainment expenses. Prior to the enactment of the Tax Reform Act of 1986, there had been 15 brackets, the top one being 50%. The Tax Reform Act of 1986 established new brackets at 15%, 28%, and 33% for individuals. The Tax Reform Act of 1986 also established a distinction between “active” and “passive” real estate income, and directed that passive income losses could not be used to offset active income gains. However, the Tax Reform Act of 1986 did benefit individuals by increasing the personal exemption and the standard deduction, and indexing the latter to inflation. Business tax reforms were part of the Tax Reform Act of 1986 as well. Changes brought about by the Tax Reform Act of 1986 included setting the top corporate tax rate at 34% and applying the alternative minimum tax to corporations.

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