DEFINITION of 'Tax Reform Act Of 1986'

A law passed by the United States Congress to simplify the income tax code. The Tax Reform Act of 1986, commonly referred to as the second of two Reagan tax cuts, lowered the top tax rate from 50% to 28% and raised the bottom tax rate from 11% to 15%. This was the first time in U.S. income tax history that the top tax rate was lowered and the bottom rate was increased at the same time. The act also mandated that capital gains would be taxed at the same rate as ordinary income.

BREAKING DOWN 'Tax Reform Act Of 1986'

In addition to altering the tax brackets, the Tax Reform Act of 1986 eliminated certain tax shelters: It required people claiming children as dependents to provide Social Security numbers for each child on their tax returns, it expanded the Alternative Minimum Tax and increased the Home Mortgage Interest Deduction to incentivize homeownership. The bill was sponsored by Richard Gephardt (D-MO) in the House of Representatives and Bill Bradley (D-NJ) in the Senate.

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