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tax reform act of 1984

legislation enacted by Congress as part of the Deficit Reduction Act of 1984 to reduce the federal budget deficit. The following are highlights from the more than 100 provisions in the Act:

  1. shortened the minimum holding period for assets to qualify for long-term capital gains treatment from one year to six months.
  2. allowed contributions to be made to an Individual Retirement Account no later than April 15 after the tax year for which an IRA benefit is sought; previously the cut-off was the following October 15th.
  3. allowed the Internal Revenue Service to tax the benefits of loans made on below-market, interest-free, or "gift" terms.
  4. tightened income averaging requirements.
  5. set a $150 per capita limit on the amount of Industrial Development Bonds that a state could issue in a year, and permitted interest to be tax-exempt only for certain "small issues."
  6. retained the 15% minimum tax on corporate tax preference items as in the tax reform act of 1976 , but increased from 15% to 20% the deduction allowed for a tax preference item.
  7. restricted golden parachute payments to executives by eliminating the corporate tax deductibility of these payments and subjecting them to a nondeductible 20% excise tax.
  8. required registration of tax shelters with the Internal Revenue Service and set penalties for failure to comply. Also set penalties for overvaluing assets used for depreciation in a tax shelter.
  9. expanded rules in ERTA to cover additional types of stock and options transactions that make up tax straddles .
  10. repealed the 30% withholding tax on interest, dividends, rents, and royalties paid to foreign investors by U.S. corporations and government agencies.
  11. raised the liquor tax, reduced the cigarette tax, and extended the 3% telephone excise tax.
  12. delayed to 1987 the scheduled decline in estate and gift taxes.
  13. granted a specific tax exemption for many fringe benefits.
  14. extended mortgage subsidy bonds through 1988.
  15. required Alternative Minimum Tax quarterly estimated payments.
  16. changed the rules affecting taxation of life insurance companies.
  17. disqualified from eligibility for long-term capital gains tax the appreciation of market discounts on newly issued Original Issue Discount bonds.
  18. real estate depreciation was lengthened from 15 to 18 years.
  19. delayed implementation of new finance leasing rules until 1988.
  20. restricted the sale of unused depreciation tax deductions by tax exempt entities to companies that can use the deductions.
  21. phased out the graduated corporate income tax on the first $100,000 of income for corporations with income over $1 million.
  22. created Foreign Sales Corporations (FSCs) to provide American companies with tax deferral advantages to encourage exports.
  23. limited tax breaks for luxury automobiles to a maximum writeoff of $16,000 in the first three years of ownership.
  24. increased the earned income tax credit for lower-income taxpayers from 10% to a maximum of 11% of the first $5,000 of income.
  25. eliminated the tax on property transfers in a divorce.
  26. increased the standard automobile mileage rate from 9 cents a mile to 12 cents a mile for expenses incurred in volunteer charity work.
  27. tightened rules and increased penalties for those who try to inflate deductions by overvaluing property donated to charity.

tax reform act of 1984

legislation that raised taxes on life insurers and further defined life insurance. Because the Tax Equity and Financial Responsibility Acts of 1982 and 1983 (TEFRA) failed to raise the amount of revenue the U.S. Treasury wanted, the 1984 Act again raised the corporate tax on life insurance companies. It also expanded the definition of life insurance to all life insurance contracts, rather than just those with flexible premiums that had been addressed in the Tax Reform Act of 1982. For flexible premium contracts, the 1982 Act established the death benefits had to represent a certain percentage of the cash value, which declined as the policyholder got older. The 1984 Act raised that ratio. For example, at age 40, the death benefit must be at least 250% of cash value for the product to qualify as life insurance. This act also attempted to redistribute the tax burden between mutual and stock life insurance companies. It also replaced a three-tier structure for taxing life insurance companies with a single-phase structure.

Copyright © 2006, 2003, 1998, 1995, 1991, 1987, 1985 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
Copyright © 2000, 1995, 1991, 1987 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.

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