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Tax Reform Act

The United States Congress passed the Tax Reform Act of 1986 in order to simplify the income tax code, broaden the tax base and eliminate many tax shelters. Referred as the second of the two “Regan tax cuts” the bill was the most recent major simplification of the tax code, reducing the number of deductions and the number of tax brackets. Below are some of the most commonly asked questions about the Tax Reform Act answered by the Experts.

If a person sells a house for a gain of less than $250,000, would they owe anything to the Internal Revenue Service (IRS)? And is this a onetime exemption?

In most cases a gain of less than $250,000 would be excluded from taxation as long as the individual owned the residence, and occupied the residence for two of the last five years. Also the exclusion could not have been used within the last two years on another property. Therefore in two years the person could sell the new residence and exclude the gain on it as well.

If a person withdrew a significant amount from their 401k last year, could they use Income Averaging to offset some of their tax bill to the IRS?

In some cases the Tax Reform Act of 1986 repealed income averaging; now it is available only for those in the business of farming or fishing. Therefore the individual would need to include the full amount of the distribution into their taxable income. However if the plan participant was born before January 2nd 1936 they may be able to elect other methods of figuring the tax on the distribution by using the ten-year option, in which they pay the tax only once for the year in which the distribution is received, not over the next ten years.

How should citizens of a country be encouraged to pay their tax obligations?

Typically in the United States (US) the system is somewhat based on voluntary compliance and recognizes that there is a cost to the things that people want from their government. However the voluntary aspect only goes so far. The IRS has the power to seize taxpayer assets in order to recover the amounts they believe are due. In order to attain a truly voluntary tax system that would require the system to be fair to all taxpayers at a level that would remove negative emotion to this aspect of life. Therefore removing loopholes, and having a system where taxes are collected in an even handed yet equitable manner would be the basis to produce a fair tax system that most would be willing to honor.

Can a person working for a contract security company get credit on their tax return for interest on credit cards, car payments, gas, telephone, uniform, and use of their vehicle?

Generally there are certain deductions that can be taken as long as the person’s employer is not reimbursing them for these expenses. Most often uniforms would fall into this category, use of the individual’s car (not counting driving to and from work) may also be deducted by actual expenses or by keeping a mileage log and then getting reimbursed for the miles driven which is 48.5 cents per mile. However the interest on a person’s credit cards is not an allowable deduction since it was phased out by the Tax Reform Act of 1986. If the person does not have enough deductions to itemize then they would qualify for the standard deductions which are for a single person $5,350, head of household $7,850, married filing joint $10,700, married filing separately $5,350, and qualifying widow/widower $10,700.

Would a person that retired at the end of 2011 be eligible for income averaging if they received a small severance and vacation payout that raised them to a higher tax bracket?

Typically since the Tax Reform Act of 1986 abolished income averaging for all taxpayers except farmers, fishermen and certain qualifying retirees who cash out their retirement plans. Taxpayers are required to pay taxes in the year the income is received regardless of whether this raises them into a higher tax bracket.

In 1986 tax shelters were running rampant. Rich people could engineer transactions to avoid most of their tax liability. These problems still exist today only to a lesser extent. The Tax Reform Act decreased individual tax rates, eliminating $30 billion dollars annually in tax loopholes, and increased corporate taxes. This subject can supply insight a few of the problems facing the American taxpayer, however it can also be the cause of numerous of questions that need to be answered by the Experts.
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