If your accounting practice has been in business for 30-plus years, you certainly remember the impact of President Reagan’s Tax Reform Act of 1986. This transformative bill significantly simplified the income tax code for a good majority of individuals; however, it made it far more complex for others. The changes were so broad and sweeping that it became known as “The Accountants’ Full Employment Act of 1986.”
The most significant changes the Act introduced (and similar discussions are occurring today) included decreasing the maximum tax rate to 28 percent and reducing the number of tax brackets from 14 to two. It also:
- Created the kiddie tax.
- Made unemployment income fully taxable.
- Did away with income averaging for most taxpayers.
- Created passive activity rules, and suddenly we had “PIGs” and “PALs” (passive income generators and passive activity losses).
- Limited IRA contribution deductions.
- Phased out, limited, or eliminated many deductions, such as personal interest, sales taxes, and business meals and entertainment.
- Repealed the dividend exclusion and treatment of long-term capital gains.
- Created the standard deduction and increased the personal exemption considerably.
- Started us down the path of limitations based on adjusted gross income.
- Greatly reduced one form of tax fraud by requiring dependent Social Security numbers to be listed on personal returns.
- Eliminated the Investment Tax Credit and made major changes to depreciation, which helped make the Act revenue neutral by shifting the tax burden from individuals to businesses.
Those of you who remember the atmosphere in 1986 know that the Act was a boon for the profession, but it also resulted in a great deal of work in short order. It created hurdles for accountants who were forced to hurry to get up to speed on the changes and the way they affected their clients. Additionally, it caused disruption amongst tax and accounting software providers who couldn’t quickly respond to such massive changes in the tax code.
Today, after 30-plus years of special interest adjustments, many of the concepts introduced and problems addressed by the Tax Reform Act have found their way back into the tax code. As a result, simplifying the code is resonating today much like it did in the early Reagan years. With President Trump now well past his 100th day in office, we may be in for a similar tax overhaul, but are we prepared for it?
How Accountants Can Prepare
About Jon Baron
Jon Baron is the managing director for the Professional Segment in the Tax & Accounting business of Thomson Reuters. He joined Thomson Reuters in 1992. Prior to his promotion to managing director in 1998, Jon was vice president of development, responsible for the design and development of all products and services for the Professional Segment. His more than 40 years of technology development and management experience includes more than 17 years with CCH Computax (now Wolters Kluwer Tax & Accounting North America software unit) in various executive technology development and operations positions.