Tax Reform Act Law and Legal Definition

The Tax Reform Act of 1986 is a Congress effort to simplify the income tax code, broaden the tax base and eliminate many tax shelters and other preferences.

The act was designed to be tax revenue neutral, because individual taxes were decreased while corporate taxes were increased. It is considered as the most recent major simplification of the tax code, drastically reducing the number of deductions and the number of tax brackets.

The changes brought by the act in the federal income tax act consist of the following six features:

1. equalized the rate of taxation on long-term capital gains paid by individual taxpayers with the top rate of federal income taxation imposed on individuals;

2. decreased the use of tax shelters, devices taxpayers used to generate deductions and tax credits Congress accomplished this goal by enacting Section 469 of the Internal Revenue Code, known to tax experts as the "passive loss rules;

3. dropped the top rate of federal income taxation of individuals from 50 percent to 28 percent;

4. eliminated deductions for interest expenses associated with buying personal consumption goods;

5. repealed the universal individual retirement account (IRA) deduction in favor of restricting the deduction to people who did not have pension coverage through other avenues, such as their employer; and

6. eliminated federal income tax liability for those below the poverty line.