Smartphone versus pager. Hybrid versus diesel. Those are just a couple of examples of how today is very different from 1987, but these eras have some similarities, including talk of tax reform.
In 1986, Congress passed the Tax Reform Act, simplifying the tax code for all. In the years since, thousands of tax provisions were added. Some provisions are meant to stimulate the economy, others to assist families with children and some to make it easier for middle-income earners to save for education and retirement. As talk of tax reform becomes more prevalent, it is worth a look back to compare 2011 to 1987, which is the first year most provisions of the 1986 Act took effect.
This scenario about how a family of four fared in 2011 versus 1987 makes it easy to see how the changes made since the implementation of the Tax Reform Act of 1986 have impacted millions of taxpayers. Following are assumptions The Tax Institute at H&R Block made when creating this scenario:
- Two working parents with a total income of $80,000 in 2011
- This would be approximately $40,115 in 1987
- The 20-year-old child is a college junior who qualifies for the maximum American Opportunity Credit
- Introduced in 1997 as the Hope Credit and expanded in 2009 under the American Recovery and Reinvestment Act to its present $2,500 maximum
- The 16-year-old child is a high school junior who qualifies for the Child Tax Credit
- Introduced in 1997 and expanded in 2002 to its present $1,000 maximum.
Not to give anything away, but the effective tax rate for this family is cut in half (from 14.9 percent to 6.9 percent) by claiming the American Opportunity Credit and the Child Tax Credit, which were not available in 1987. Check out our latest infographic to learn more.
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