TRA 86 was the largest revision of the Tax Code since 1954. It was also known as the “Tax Professionals Full Employment Act of 1986”.
While increasing the need for taxpayers to seek the help of professionals at tax time, the Act did away with much of the magic that we tax preparers could perform by phasing out Income Averaging and Ten-Year Averaging, as well as other tax deductions and breaks (including the itemized deduction for “personal” interest). It also introduced the “Kiddie Tax” and the 2% of AGI exclusion of miscellaneous itemized deductions.
A major component of TRA 86 was the introduction of the “passive activity” rules to close many of the loopholes that allowed tax shelters to thrive. As such, the Act should have also done away with the dreaded Alternative Minimum Tax (AMT), whose original purpose was to keep high-income taxpayers from taking excessive advantage of tax shelters to altogether avoid paying federal income taxes. Instead the Act helped to create the monster that the AMT has become today.
An item in the Tax Foundation’s TAX POLICY BLOG from last year points out that in the 20 years since TRA 86, “much of what passed in 1986 to limit special tax loopholes has already crept back into the system courtesy of politicians quick to give in to whatever lobby fills their pockets”.