Newspaper article THE JOURNAL RECORD

1986 Tax Reform Act Cuts Taxes for Most Taxpayers

Newspaper article THE JOURNAL RECORD

1986 Tax Reform Act Cuts Taxes for Most Taxpayers

Article excerpt

For the vast majority of Americans, the monumental Tax Reform Act of 1986 has meant slightly lower taxes and an easier time figuring them out.

But for some people, most of them well-to-do, the new law has meant much higher taxes and a nightmare of unfathomable rules and regulations.

Detailed statistics are not yet available, but this is clear: The winners include almost everyone whose income consists primarily of a wage or salary, interest and dividends.

The losers are those whose incomes are mostly from capital gains, who had invested heavily in tax shelters or who had borrowed heavily.

``My guess,'' said Fred T. Goldberg Jr., commissioner of the IRS, ``is that the overwhelming number of people are paying less. Disproportionately, those with tax increases are those making six-figure incomes.''

The law, he said, ``simplified the system for tens of millions of Americans.'' On the other hand, he acknowledged, many people who own their own businesses and some others with unusual financial arrangements face ``a staggering burden of complexity.''

The 1986 law, the most sweeping overhaul of the tax code since World War II, dramatically reduced tax rates while increasing the personal exemption and standard deduction significantly. At the same time, it raised the rate on capital gains and eliminated or curtailed scores of specific deductions, exemptions and other tax breaks. It also shifted a portion of the tax burden from individuals to businesses.

Before, there were more than a dozen different tax brackets ranging up to 50 percent. Now, there are only two basic ones, 15 percent and 28 percent, although because of a quirk in the law, a couple with a taxable income between about $75,000 and $155,000 will pay 33 percent on a portion of their income, as will a single person with taxable income of about $45,000 to $93,000.

Among the common deductions eliminated were those on sales taxes, and in most cases contributions to individual retirement accounts were no longer deductible.

Working couples are no longer entitled to a partial deduction on one of their salaries.

Deductions for consumer interest payments were phased out gradually, so that only 20 percent can be deducted on 1989 returns.

Medical and dental expenses and miscellaneous expenses such as union dues, employee business expenses and tax preparation fees had to exceed certain floors to be deductible, so few taxpayers today are entitled to deductions.

Perhaps most important in terms of tax policy, the tax shelters - investments made primarily to reduce taxes through paper losses - were virtually abolished.

Most provisions of the law went into effect in 1987. But the new rate structure was not put in place until 1988. Final data have not been compiled on who paid how much on 1988 returns, which were filed last year.

But the figures available seem to bear out Goldberg's assessment that most taxpayers pay less and find the chore of maintaining records and completing the tax forms less difficult.

For example, as a percentage of total income, the average tax owed by people with incomes between $20,000 and $30,000 slipped to 9.3 percent in 1988 from 9.7 percent in 1986. For taxpayers with incomes between $30,000 and $50,000, the average edged down to 11.1 percent from 11.5 percent.

The average also dropped for those with incomes over $100,000, to 22.2 percent from 22.8 percent. But experts say the average figure at the upper-income level is meaningless. Some affluent taxpayers owed much more and some much less in 1988 than they did in 1986.

Moreover, the higher standard deductions enable many more people to file a short form (1040A or 1040EZ), and the curtailment of deductions means that taxpayers do not have to keep as many records as were once required. …

Author Advanced search


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.