Tax Reduction Act of 1981

Tax Reduction Act of 1981 - Title I: Individual Income Tax Reductions - Amends the Internal Revenue Code to reduce individual income tax rates for 1981 and provide permanent rate reductions thereafter. Reduces the lowest marginal rate from 14 to 12 percent. Increases the amount of the zero bracket amount for each category of individual taxpayer. Increases the income levels at which a taxpayer is required to file an income tax return.

Increases the amount of the personal income tax exemption from $1,000 to $1,100.

Increases the rate of the earned income tax credit from ten to eleven percent of earned income of $5,000 and below. Increases the allowable amount of such credit.

Allows married individuals filing a joint return an income tax deduction from gross income of ten percent of the lesser of $30,000 or the earned income of the lower income spouse. Specifies that the rate of such deduction will be five percent, instead of ten percent, in taxable year 1981.

Allows individuals under age 55 to elect the one-time exclusion of gain from sale of a principal residence.

Title II: Depreciation Reform - Allows a first-year income tax deduction for a specified percentage of the basis of property used in a trade or held for the production of income (recovery property). Excludes from the category of recovery property: (1) property placed in service before January 1, 1981; and (2) certain property eligible for amortization.

Directs the Secretary of the Treasury to prescribe tables for the classification of types of recovery property into not more than 30 categories.

Provides for a phase-in of the full recovery property percentage of ten percent in 1982 and 1983, 50 percent in 1984, and 100 percent in 1985.

Disqualifies capital cost recovery property from investment tax credit treatment and from additional first-year depreciation.

Exempts accelerated depreciation on recovery property from classification as an item of tax preference for purposes of computing the minimum tax.

Requires that the depreciation of certain real property be computed under the straight-line method using a useful life of 25 years.