Tax Reform Act
What is the Tax Reform Act?
The 1986 Tax Reform Act was a law passed by the US Congress with the goal of simplifying the income tax code. The Act reduced the maximum rate on ordinary income (the top marginal tax bracket income tax rates) and raised the tax on long-term capital gains.
Understanding the 1986 Tax Reform Act
This act was signed into law by President Ronald Reagan, on October 22, 1986. This Act is known as the second of the two Reagan tax cuts, with the first being the Economic Recovery Tax Act of 1981.
The 1986 Tax Reform Act and tax brackets:
The 1986 Act:
– Lowered the top tax rate on ordinary income from 50% to 28%, and;
– Raised the bottom tax rate from 11% to 15%.
This was the first time in US history that the top tax rate was lowered and the bottom was increased simultaneously.
In addition to this, the 1986 Act also eliminated the distinction between long-term capital gains and ordinary income. It mandated that capital gains would be taxed at the same rights as ordinary income, when they had previously been taxed at lower rates or received a partial tax exclusion. This meant that the maximum tax rate on long-term capital gains was increased from 20% to 28%.
The corporate tax rate for businesses was reduced from 50% to 35%, and reduced the allowances and deductions for certain business expenses – including business meals, travel, and entertainment.
The 1986 Tax Reform Act and tax shelters:
The 1986 Tax Reform Act also eliminated certain tax shelters. The Act:
– Increased the Home Mortgage Interest Deduction to incentivise homeownership
– Required people claiming children as dependents to provide Social Security numbers for each child on their tax returns
– Expanded the Alternative Minimum Tax (AMT) – the least tax an individual or corporation must pay after all eligible exclusions, credits, and deductions have been taken
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
Get a quote here.
1993 Tax Reform Act
The 1986 Tax Reform Act was then followed by a bill in 1993.
The Tax Reform Act of 1993 was a piece of legislation also known as the Revenue Reconciliation Act of 1993. This created a few major provisions for individuals and businesses.
– The addition of the 36% tax bracket
– Increased gasoline taxes
– Increased taxes on Social Security benefits
– Eliminated the tax cap on Medicare
– An additional 10% tax on married couples with income above $250,000
– Increased corporate tax rate
– A lengthening of the goodwill depreciation period
– The elimination of deductibility for congressional lobbying expenses
Many other taxes were raised, and deductions reduced or eliminated as well.
Living abroad and holding US citizenship
Holding US citizenship when you live outside the United States usually creates complex tax affairs.
The United States is one of only two countries in the world that use a citizenship-based taxation system.
This means any person holding US citizenship must report their worldwide income on a federal tax return every year, once they exceed the low filing threshold.
Spread the word. Please share… 👉