Tax Reform Act of 1986

Tax Reform Act of 1986

The Congress of the USA passed the Tax Reform Act (TRA) of 1986 to reduce tax rates, broaden the tax base and eliminate many tax shelters and other preferences. The top tax rate was lowered to 28%. As a result, capital gains faced the same tax rate as ordinary income. Moreover, interest on consumer loans and state and local sales taxes was no longer deductible. The law increased the personal exemption and standard deduction.

The Tax Reform Act of 1986 also increased incentives favoring investment in owner-occupied housing relative to rental housing by increasing the Home Mortgage Interest Deduction. The imputed income an owner receives from an investment in owner-occupied housing has always escaped taxation, but TRA86 changed the treatment of imputed rent, local property taxes, and mortgage interest payments to favor homeownership, while phasing out many investment incentives for rental housing. Since low-income people are more likely to live in rental housing than in owner-occupied housing, this would have decreased the new supply of housing accessible to them. The Low-Income Housing Tax Credit was hastily added to TRA86 to provide some balance and encourage investment in multifamily housing for the poor.

Related Legislation

1964 - Revenue Act PL 88-272
1981 - Kemp-Roth Tax Cut
1986 - Economic Recovery Tax Reform Act PL 99-514

External Links

http://www.tcf.org/Publications/Basics/Tax/History.html