Economic Recovery Tax Act of 1981

Summary

Tax Incentive Act of 1981 - Title I: Individual Income Tax Provisions - Amends the Internal Revenue Code to reduce individual and estate and trust income tax rates for 1981 and 1982, with further reductions in 1983 and thereafter. Conditions the 1984 tax reduction upon the attainment of specified levels in the budget deficit, the Consumer Price Index, and the Treasury bill rate in 1983. Authorizes the Secretary of the Treasury to issue regulations permitting workers to increase or decrease their withholding allowances. Reduces the highest marginal tax rate on all types of income from 70 to 60 percent in 1982 and to 50 percent in 1983. Repeals the existing 50 percent maximum tax rate on personal service income, effective in 1983. Increases the zero bracket amount for each category of taxpayer. Increases the income levels at which a taxpayer is required to file an income tax return. Reduces the alternative minimum tax and the personal holding company tax to correspond with the reductions in the highest marginal tax rate. Increases the rate of the earned income tax credit from ten to 11 percent of the first $5,000 of earnings beginning in 1982. Provides for increases in the maximum allowable dollar amount of such credit in 1982 and 1984. Allows married individuals filing a joint return an income tax deduction from gross income of ten percent of the lesser of $50,000 or the earned income of the lower income spouse. Increases the amount of the tax credit allowable for expenses for household and dependent care services necessary for gainful employment, beginning in 1982. Revises requirements for the tax exclusion of the earned income and housing expenses of Americans working abroad. Increases the amount of the earned income exclusion by specified annual increments up to $95,000 for 1986 and thereafter. Increases the amount of the tax exclusion for the housing costs of such individuals to an amount by which the taxpayer's housing costs exceed 16 percent of a GS-14, step 1 salary level for a Federal employee. Permits a tax deduction for excess housing costs which are not excludable. Repeals the requirement that such U.S. citizens work in hardship areas to be eligible for the tax exclusion. Reduces the length of the residency requirement for the tax exclusion. Waives such requirement if the Secretary of the Treasury determines that the taxpayer would otherwise have met the residency requirement but for the occurrence of civil unrest, war, or other adverse conditions precluding the normal conduct of business. Repeals the income tax deduction for certain living expenses of U.S. citizens abroad. Provides for an income tax exclusion for the value of employer-provided lodging in a camp in cases where satisfactory housing is not generally available. Amends the Foreign Earned Income Act of 1978 to extend the reporting requirement by requiring the Secretary to report to specified congressional committees on the operation and effects of the foreign earned income exclusion quadrennially beginning after the enactment of the Tax Incentive Act of 1981. Increases from $100,000 to $125,000 the amount of the one-time exclusion of gain from sale of a principal residence by an individual who has attained age 55. Increases from 18 months to 2 years the rollover period for such exclusion. Title II: Business Provisions - Amends the Internal Revenue Code to replace the current system of depreciation with a first-year income tax deduction equal to the basis of personal property used in a trade or business or held for the production of income (expense-method property) which is placed in service after 1980. Phases in such expensing method by limiting the income tax deduction to a specified percentage of the basis of such property each year through 1990. Permits the first $25,000 worth of qualified assets to be expensed in the year they are purchased or placed in service without regard to the phase-in period. Excludes from eligibility for expensing: (1) property used predominantly outside of the United States; (2) certain property held by noncorporate lessors; (3) certain property not eligible for the investment tax credit; (4) certain public utility property; (5) property acquired at death; (6) certain livestock; (7) railroad tank cars; (8) oil pipelines; and (9) certain films. Disqualifies expense-method property from eligibility for the investment tax credit after 1985. Exempts accelerated depreciation on leased personal property from classification as an item of tax preference for purposes of computing the minimum tax. Revises the treatment of property depreciated under the retirement-replacement-betterment method to allow a five-year amortization of the existing adjusted basis of such property. Repeals the retirement-replacement-betterment method of depreciation. Repeals the additional first-year depreciation allowance for small business. Allows the depreciation of real property based on a useful life of 15 years. Permits the taxpayer to elect either the straight-line or declining balance method of depreciation for such property. Specifies that the declining balance method shall be at a rate of 200 percent of the straight-line depreciation rate for low-income housing and targeted area property and 150 percent for all other property. Revises component depreciation rules to provide that the taxpayer must utilize the same recovery period and method of depreciation for a building and its structural components. Allows separate depreciation of substantial improvements made after the property has been in service for three years. Excludes the following types of property from eligibility for accelerated depreciation: (1) property with a class life of 12 1/2 years or less; (2) mobile homes; and (3) property eligible for amortization. Establishes a method of simplified cost recovery for long-life public utility property. Establishes the following two classes and recovery periods for such property: (1) Class 1 property which has a present class life of more than 18 but less than 25 years, 15 year recovery; and (2) Class 2 property which has a present class life of over 25 years, ten year recovery. Excludes from eligibility for accelerated depreciation public utility property for which the normalization method of accounting is not used and property eligible for amortization. Requires the taxpayer to establish a recovery account for each class of public utility recovery property. Provides special rules for the depreciation of property not eligible for the expense-method of cost recovery. Sets forth guidelines for the determination of the useful life of such property. Provides that, for purposes of computing the earnings and profits of a corporation in an taxable year, the useful life of expense-method property shall be the lower life limit of such property and the useful life of real property shall be 35 years. Reduces corporate income tax rates for 1982 through 1987 and thereafter. Revises the method of computing the income tax on mutual insurance companies. Increases the investment tax credit percentage for rehabilitation expenditures to 15 percent for 30-year buildings, 20 percent for 40-year buildings, and 25 percent for certified historic structures, effective in 1982. Qualifies for the investment tax credit certain rehabilitated buildings leased to tax-exempt organizations or to governmental units. Increases from $150,000 to $250,000 the amount which corporations may accumulate for reasonable needs of the business without being subject to the tax on accumulated earnings. Disallows such increase for corporations performing services in the areas of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting. Increases the allowable number of shareholders in a Subchapter S corporation from 15 to 25. Permits qualified trusts to be shareholders of Subchapter S corporations. Allows a beneficiary of such a trust to be treated as the owner of such trust. Extends ordinary low treatment of small business stock to preferred stock (previously only common stock). Requires the Secretary of the Treasury to study and report to specified congressional committees on methods of tax accounting for inventory which minimize income distortions resulting from inflation. Allows a nonrefundable income tax credit for 25 percent of the qualified research expenses incurred by a taxpayer in carrying on any trade or business to the extent that such expenses exceed the average amounts of the taxpayers expenses in a specified base period. Defines "qualified research expenses" as amounts paid or incurred for in-house and contract research. Allows such credit for basic research contracted out to colleges, universities, and tax-exempt scientific research institutes. Excludes from eligibility for such credit research conducted outside of the United States, research in the social sciences or humanities, exploration for ore or other minerals, and activities performed by the taxpayer for another person. Provides for a carryover and carry back of any unused credit. Terminates such credit after 1985. Revises the limits on the allowable deduction for corporate charitable contributions of inventory property which is contributed to an institution of higher education and used for research purposes. Suspends regulations relating to the allocation of research and experimental expenditures paid or incurred for activities conducted in the United States. Requires the Secretary to study and report to Congress on the effect such regulations would have on research and experimental activities conducted in the United States. Allows certain distressed industries (auto, steel, paper, railroad, mining, and airlines) to carryback unused investment tax credits to 1962 and use them against all tax liabilities incurred during those years. Requires that tax refunds resulting from such carryback be reinvested in property relating to such industries. Extends from seven to 20 years the carryover period for certain net operating losses and investment tax credits. Title III: Individual Savings - Amends the Internal Revenue Code to increases the maximum allowable tax deduction for contributions to an individual retirement account (IRA) to the less of $2,000 or 100 percent of an individual's compensation income. Allows such deduction for IRA contributions or voluntary contributions to a qualified employer plan for individuals who are active participants in a qualified employer plan or government plan. Allows employees a deduction for employer contributions to a simplified employee pension. Limits such deduction to the lesser of 15 percent of the taxpayer's compensation income on the amount of such contributions (up to $15,000). Repeals provisions relating to the tax deduction for retirement savings for certain married individuals. Increases the limit on deductible contributions to owner-employee retirement plans from $7,500 to $15,000 (or 15 percent of the earned income derived by employees from the trade or business, whichever is less). Increases the amount of compensation which may be used to determine annual benefit accruals for purposes of applying limits on deductible contributions. Revises rules relating to the taxation of the beneficiaries of qualified bond purchase plans and for the rollovers of the proceeds from redemption of such bonds into IRAs or other annuities. Revises requirements for the qualification of trusts and plans benefitting owner-employees and for the investment by IRAs in collectibles. Excludes from gross income interest received on a savings certificate issued by a qualified bank, savings and loan institution, or credit union. Requires that such certificates have a maturity of one year and an investment yield which does not exceed 70 percent of the Treasury bill rate. Permits such exclusion only to the extent that the interest income received by the taxpayer exceeds the amount of such income received in the previous year, up 59 $1,000 ($2,000 for joint returns). Requires institutions issuing such certificates to invest 75 percent of the proceeds in residential financing and agricultural loans. Requires the Secretary to report to Congress on such exemption's effectiveness in generating additional savings. Amends the Crude Oil Windfall Profit Tax Act of 1980 to repeal the partial exclusion of interest from gross income for taxable year 1983. Allows shareholders in public utility corporations to exclude up to $1,500 ($3,000 for joint returns) a year of dividends received if the dividends are reinvested in stock in the utility. Title IV: Estate and Gift Tax Provisions - Amends the Internal Revenue Code to increase the unified credit against the estate and gift tax from $47,000 to $192,800 by specified annual increments through 1986. Increases the minimum gross estate required for the filing of a return from $175,000 to $600,000 by specified annual increments through 1986. Reduces the maximum estate tax rate to 50 percent. Phases in such reduction between 1982 and 1984. Repeals the limitations on the estate and gift tax marital deductions. Sets forth special rules for: (1) the estate taxation of certain property for which the marital deduction was previously allowed; (2) the tax treatment of disposition of certain life estates; and (3) recovery rights in the case of certain marital deduction property. Increases the maximum reduction (currently $500,000) in fair market value under the rules for special estate tax valuation based on use for certain farms and small businesses to $1,000,000 in 1983 or thereafter. Qualifies estates of decedents who were disabled or retired for the special valuation of certain farms based on use if such decedents materially participated in the operation of the farm for five out of eight years preceding the year in which they became disabled or eligible for disability benefits under title II (Old Age, Survivors and Disability Insurance) of the Social Security Act. Reduces from 15 to ten years the length of time a qualified property must be held and put to a qualified use following the decedent's death before it can be disposed of without incurring a recapture of estate tax benefits. Permits active management rather than material participation as a test for qualification of the estate for spouses, children under 21, students, and disabled individuals who receive property from a decedent who qualified for special use valuation. Allows the like kind exchange of property without loss of special use valuation eligibility. Allows valuation based on net crop share rentals as an alternative method of valuing farms. Authorizes the step-up in basis of such assets. Repeals the requirement that an heir elect special treatment for involuntary conversions of qualified real property, thus making such treatment automatic upon such conversion. Treats use as a woodland as a qualified use for purposes of the special estate tax valuation. Requires that the value of timber be included in the valuation. Qualifies the owner of a woodland for the special use valuation if the owner or member of the owner's family actively managed the property. Sets forth a procedure for making binding determinations of the fair market value of property eligible for the special use valuation. Modifies the alternative extension of time for payment of the estate tax where the estate consists largely of an interest in a closely held business to: (1) allow an installment election if the value of the interest in the closely held business exceeds 35 percent of the adjusted gross estate; (2) increase to 50 percent the value of an interest disposed of which will accelerate the payment of tax; and (3) permit payment, but with a penalty, of an installment within six months after the due date. Exempts from the acceleration of payment requirement disp made in a series of subsequent transfers of the property to family members by reason of death. Authorizes the Tax Court to issue declaratory judgments with respect to controversies involving the extension of time for payment of the estate tax. Provides that, for purposes of the estate and gift tax charitable deduction, a work of art and the copyright on such work of art shall be treated as separate properties. Provides that the gifts made within three years of a decedent's death shall not be included in the gross estate basis for appreciated property acquired by the decedent by gift within three years of death. Allows a disclaimer of an interest in property for estate tax purposes in specified circumstances where a written transfer of the transferer's entire interest in the property is executed and the transfer meets certain other requirements. Repeals the estate tax deduction for certain bequests to minor children. Increases from $3,000 to $10,000 the annual gift tax exclusion. Provides an unlimited gift tax exclusion for certain transfers for educational or medical expenses. Permits the payment of gift taxes annually rather than quarterly. Title V: Tax Straddles - Amends the Internal Revenue Code to allow taxpayers to deduct straddle losses only to the extent of the sum of straddle gains and net non-straddle commodity gains. Permits the carry forward of any disallowed straddle losses. Defines "straddle transaction" as the sale, exchange, or disposition of: (1) a futures contract; (2) a forward contract; (3) a commodity (including metals); (4) Treasury bills and other debt instruments; (5) currency; or (6) any interest in such assets. Exempts hedging transactions from the rule limiting straddle losses. Specifies that syndicates are not entitled to the hedging exemption. Disallows as a deduction, and makes chargeable to capital account, interest and carrying charges with respect to personal property which is part of a straddle. Exempts hedging transactions from such capitalization rule. Exempts futures traders from the capitalization rule and sets forth special rules allowing such traders to offset gains from commodity-related transactions. States that a taxpayer shall be considered to hold an offsetting position if there is a substantial reduction of the taxpayer's risk of loss from holding any position with respect to personal property because the taxpayer also holds one or more other positions with respect to personal property (commodities, evidences of indebtedness, currency, and other types of personal property). Creates a rebuttable presumption that two or more positions are offsetting if: (1) the positions are in the same personal property, even if in an altered form; (2) the positions are sold or marketed as offsetting positions; (3) the aggregate margin requirement for the positions is less than the sum of the margin requirements for each position; (4) the positions are in debt instruments; or (5) the positions are determined under regulations prescribed by the Secretary of the Treausry to be offsetting positions. Provides that obligations of the United States, a State or local government, or a U.S. possession issued on a discount basis and payable without interest in less than one year shall be treated as capital assets in determining tax consequences of gain or loss with respect to such obligations. Specifies that the discount on such obligations shall be treated as ordinary income. Excludes from capital gains tax treatment gain by a securities dealer from the sale or exchange of any security, unless the security was clearly identified in the dealer's records before the end of the day after the date of acquisition as security held for investment (currently, before the end of the 30th day after the date of acquisition). Provides that gain or loss attributable to the certain terminations of a right or obligation with respect to personal property which is a capital asset in the hands of the taxpayer shall be treated as gain or loss from the sale of a capital asset. States that the straddle loss limitations shall apply to property acquired and positions established after January 27, 1981. Requires the Secretary of the Treasury to study and report to Congress on the effects of such limitation. Title VI: Energy Provisions - Amends the Internal Revenue Code to exempt oil producers, in the amount equal to 500 barrels of crude oil multiplied by the number of days in the quarter, from the windfall profit tax. Exempts a producer's tier one and tier two oil from such tax in an amount equal to 100 barrels multiplied by the number of days in the quarter in 1982, with specified increases in such amount up to 350 barrels in 1986 and thereafter. Increases from $1,000 to $2,500 the amount of the credit for any windfall profit tax paid in connection with taxable crude oil which is attributable to a qualified royalty interest and which is removed from the premises during 1981. Exempts royalty interest from the windfall profit tax in 1982 up to one barrel per day from 1982 through 1984, two barrels a day in 1985, and three and one-half barrels a day in 1986. Extends the exemption from the windfall profit tax for independent producers of front-end teritary oil (for projects certified on or before January 28, 1981) to April 1, 1982. Provides that, for purposes of the exemption from the windfall profit tax, natural gas retailing shall not be taken into account in determining independent producer status. Exempts from the windfall profit tax oil produced from interests held by or for a residential child care agency. Defines such an agency as a tax-exempt charitable organization operated primarily for the residential placement, care, or treatment of delinquent, dependent, neglected, or handicapped children. Foreign Oil and Gas Tax Act of 1981 - Excludes from gross income any foreign oil and gas extraction income of a taxpayer. Disallows any tax credits or deductions attributable to such income or for the amount expended for oil and gas exploration outside of the United States. Disallows the foreign tax credit for excess foreign oil related payments by domestic corporations. Provides that the oil-and gas- related income of a foreign corporation controlled by a U.S. company shall be presently taxed (instead of deferred as under present law). Allows home builders a nonrefundable income tax credit for the construction of residences which incorporate a passive solar energy system. Limits the dollar amount of such credit to $2,000 for calendar years prior to 1987 and phases out the amount of the credity by $500 decrements until 1990 when such credit terminates. Defines a "passive solar energy system" as a system which contains a solar collection area, an absorber, a storage mass, a heat distribution method, and heat regulation devices. Requires that such system be installed in a new residence after September 30, 1981, and before January 1, 1990. Directs the Secretary of the Treasury, after consultation with the Secretaries of Energy and Housing and Urban Development, to prescribe regulations setting forth a solar construction credit table and a table of insulation factors for such residential units. Title VII: Administrative Provisions - Requires that tax returns and return information be made available to officers and employees of the General Accounting Office for the purpose of any audit authorized by law with respect to any program or activitity carried out under the Social Security Act. Prohibits the disclosure of methods for the selection of tax returns for audits. Revises rules for the determination of the interest rate on overpayments or underpayments of taxes. Changes such rate of interest from 90 percent to 100 percent of the prime rate. Changes certain penalties for providing false information with respect to the withholding of tax. Requires an addition to tax for underpayments of tax by individuals and certain corporations attributable to a valuation overstatement. Increases penalties for failure to file certain returns or furnish certain registration statements. Increases the penalty for overstated deposit claims. Provides that no declaration of estimated tax by individuals is required if such estimated tax is less than a specified amount. Increases from 60 to 80 percent the amount in total tax liability which certain large corporations must pay in estimated taxes. Increases the rate of the employer and employee railroad retirement taxes. Allows the Railroad Retirement Account to borrow funds from the Treasury if the balance of such Account is insufficient to pay annuity amounts due. Title VIII: Miscellaneous Provisions - Revises requirements for the exemption from income taxation of any income resulting from the transfer of stock to an individual exercising a restricted stock option. Limits the aggregate fair market value of the stock for which an employee may be granted such options to $75,000 a year for option exercised after 1980. Eliminates such options as items of tax preference for purposes of the minimum tax. Extends until January 1, 1983, the time during which a State legislator may qualify for the income tax deduction for living expenses while engaged in legislative business away from his home district. Limits such deduction to 110 percent of the daily amount allowable for Federal employees away from home but serving in the United States. Disallows such deduction for State legislators whose district residence is within 50 miles from the State capital. Permits the exclusion from goss income of interest on certain industrial development bonds if the proceeds of such bonds are used to finance qualified mass commuting vehicles which are leased to a publicly-owned transportation system. Terminates such exclusion after 1984. Extends the targeted jobs credit through 1984. Increases the amount of wages eligible for such credit. Lowers the age requirements for the credit for employment of economically disadvantaged youth. Extends eligibility for such credit to registrants of the WIN work incentive program and to recipients of Aid to Families with Dependent Children. Eliminates the age requirement applicable to Vietnam veterans. Repeals provisions limiting qualifying first-year wages to 30 percent of the unemployment insurance wages paid by an employer. Disallows such credit with respect to amounts paid to certain relatives of the taxpayer or shareholders of the taxpayer corporation. Extends through May 31, 1983, the prohibition on the issuance of any regulations by the Internal Revenue Service on: (1) employer fringe benefits; and (2) the deduction of commuting expenses to temporary job sites. Extends through 1986 the effective date of the requirement that construction period interest and taxes for low- income housing projects be amortized (instead of expensed as an immediate deduction). Authorizes the Secretary of the Treasury to make separate payments to the governments of Guam and the Virgin Islands for lost tax revenues. Allows motor carriers an income tax deduction for the value of motor carrier operating authorities held by the taxpayer on July 1, 1980. Requires the amortization of such amount over a 60-month period. Revises rules relating to substantial risks of forfeiture of property transferred to employees in connection with the performance of services for purposes of the income taxation of such property. Provides that bonds issued by a volunteer fire department to finance the acquisition, construction, reconstruction, or improvement of firefighting property shall be treated as obligations of a local government and the interest on such bonds shall be excluded from gross income. Provides that a volunteer fire department qualifies for such tax treatment of its bonds if it: (1) is organized and operated to provide firefighting services in an area which does not have any other firefighting services; (2) is required by a local government to furnish firefighting services; (3) receives over half of its funding from local government; and (4) makes no charge for its services. Title IX: Loans to State Unemployment Funds - Limits the reduction in the credit against Federal unemployment tax liability for employers required if advances are made to the unemployment account of a State under title XII (Advances to State Unemployment Funds) of the Social Security Act. Provides that such credit shall not be reduced if such a State repays such advance during a one-year period ending on September 30 and such repayment is not less than the sum of the State's potential additional taxes for the taxable year, plus any advances made to such State during such one-year period. Empowers the Secretary of Labor to require a State to furnish any information necessary to determine if such State has made proper repayments. Amends the Social Security Act, title XII (Advances to State Unemployment Funds)., to set forth interest rates for State repayments of any advance made to a State during a taxable year in which such State is availing itself of the cap on credit reduction.

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4 official files

• Public Law (PDF)

  Public Law · EN · 14 August 1981

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• Conference report filed in House

  summary · EN · 1 August 1981

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• Passed House amended

  summary · EN · 29 July 1981

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• Introduced in House

  summary · EN · 23 July 1981

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