Tax Reduction Act

Tax Reduction Act - Title I: Provisions Primarily Affecting Individual Income Tax - Amends the Internal Revenue Code to reduce income taxes for individuals and estates and trusts for taxable years beginning after December 31, 1978. Increases the zero bracket amount to $3,400 for certain surviving spouses and married individuals filing joint tax returns, to $2,300 for unmarried individuals, and to $1,700 for a married individual filing a separate return. Increases for single individuals, surviving spouses, and married individuals filing joint tax returns the minimum income level at which an income tax return must be filed. Adjusts withholding amounts to reflect such increases.

Increases the personal exemption from $750 to $1,000.

Makes permanent the earned income credit.

Repeals tax deductions for State and local taxes on the sale of gasoline, diesel fuel, and other motor fuels.

Revises the tax deduction for medical and dental expenses to permit the taxpayer to deduct all expenses relating to medical care, medical insurance, and prescription drugs which exceed three percent of the taxpayer's adjusted gross income. Repeals special provisions allowing itemized deductions for one-half the cost of medical and hospitalization insurance premiums (up to $150) and for medicine and drug expenses which exceed one percent of adjusted gross income. Defines "prescribed drug" to mean a drug or biological requiring a prescription of a physician for its use by an individual.

Repeals the tax deduction for contributions to candidates for public office and to political newsletter funds.

Requires the inclusion of certain amounts of unemployment compensation in gross income if gross income otherwise exceeds certain prescribed levels for any taxable year.

Permits deferral of income tax on compensation received by an employee under a public or private nonqualified deferred compensation plan. Limits employer contributions to such plans to the same extent as contributions to qualified plans are limited. Requires a public plan to provide for participation of employees at all income levels. Allows tax deductions for deferred payments for services performed by independent contractors on the same basis as such deductions are allowed for employees.

Title II: Tax Shelter Provisions - Extends the rule which limits tax deductions for business losses to amounts which a business actually had at risk to all activities engaged in for the production of income, except those relating to real estate. Requires the recapture of "at risk" deductions where the taxpayer withdraws the amount originally placed at risk.

Imposes additional civil fines upon partnerships which fail to file timely or accurate partnership returns. Extends the statute of limitations for assessing income tax deficiencies of partnerships required to be registered with the Securities and Exchange Commission to four years after the partnership return is filed.

Title III: Provisions Primarily Affecting Business Income Tax - Reduces the maximum corporate income tax rate to 46 percent of taxable income in excess of $100,000. Establishes graduated income tax rates for corporations, ranging over five brackets, from a 17 percent rate on the first $25,000 of corporate income to a maximum 46 percent rate on income over $100,000. Excludes mutual savings banks conducting life insurance business, insurance companies, regulated investment companies, real estate investment trusts, and foreign corporations from the new rates.

Makes permanent the ten percent investment tax credit and the $100,000 limitation on used property eligible for the credit. Increases over a four-year period the maximum allowable investment tax credit to $25,000 plus 90 percent of an individual's tax liability which exceeds $25,000. Sets forth alternative limitations on the investment tax credit allowable for taxpayers investing in public utilities, railroads, and airlines.

Allows the full investment tax credit for pollution control facilities which are eligible for the 60 month amortization election (presently, only 50 percent of such credit may be offset against tax liability), except to the extent that such facilities are financed by tax-exempt industrial development bonds.

Establishes for taxable years beginning in 1979 or 1980 a tax credit equal to 50 percent of the unemployment insurance wages paid by an employer to: (1) individuals who have registered for the work incentive (WIN) program under Title IV (Aid to Families with Dependent Children) of the Social Security Act; (2) mentally or physically disabled individuals referred to the employer under a State plan for vocational rehabilitation; or (3) individuals of ages 18 through 24 who are members of households receiving food stamps. Limits the amount of wages to which the credit is applicable to the first $6,000 of an eligible individual's wages reduced by the amount of such individual's wages paid by the employer in the preceding calendar year. Provides that the amount of unemployment insurance wages eligible for the tax credit cannot exceed 20 percent of the total amount of such wages paid by an employer to all his employees.

Increases from 10 to 15 the number of shareholders a small business may have without losing Subchapter S corporate status. Treats a husband and wife owning stock in a Subchapter S corporation as one stockholder for purposes of determining the number of stockholders in such a corporation. Treats the grantor of a trust owning stock in a Subchapter S corporation as the stockholder. Extends the time period for making a Subchapter S election to the first 75 days after the beginning of the taxable year and allows such an election at any time during the preceding taxable year. Treats any election made after the 75 day period as an election made for the following taxable year.

Increases to $1,000,000 the amount of small business corporation stock which a corporation may issue as potentially subject to ordinary loss treatment. Increases to $50,000 ($100,000 for married individuals filing joint tax returns) the amount of loss on small business corporation stock which may be treated as ordinary, rather than capital, loss. Repeals the requirement that a corporation issue small business corporation stock pursuant to a plan developed by the corporation.

Increases the amount of allowable first year additional depreciation for small business property to 25 percent of the first $20,000 of such property ($40,000 for married individuals filing joint tax returns). Extends eligibility for such depreciation allowance to only those taxpayers whose depreciable property has an aggregate adjusted basis of less than $1,000,000.

Exempts from the rule requiring accrual accounting and capitalization of expenses incurred in preproductive periods certain two and three family farm corporations. Exempts farmers, nurserymen, and florists who use an accrual method of accounting and who are not required to capitalize preproductive period expenses from the requirement of taking an inventory of growing crops in computing taxable income. Permits such individuals to change to a cash method of accounting until 1981.

Title IV: Capital Gains - Repeals the alternate 25 percent tax rate on the first $50,000 of long term capital gain of individual taxpayers. Removes capital gains of individuals and corporations as an item of tax preference for purposes of computing the minimum or maximum tax.

Title V: Pension Simplification - Amends the Internal Revenue Code to permit employers to establish pension plans for their employees which are funded exclusively by individual retirement accounts (IRA's). Exempts such plans from the minimum funding standards applicable to other tax-exempt pension plans.

Limits employer contributions to such pension plans to 15 percent of an employee's gross income for the taxable year or $7,500, whichever is less.

Disallows tax deductions for employee contributions to an individual retirement account in a taxable year in which such employee participates in a pension plan established by this Act.