Fair and Simple Tax Act of 1985

Fair and Simple Tax Act of 1985 - Title I: Reduction of Individual and Corporate Tax Rates - Subtitle A: Reduction of Rates - Amends the Internal Revenue Code to revise individual tax rates. Imposes a tax rate of 24 percent on the taxable income of every individual, estate, and trust. Imposes a tax rate of 15 percent on corporate income which does not exceed $50,000, 25 percent on taxable income exceeding $50,000 but not exceeding $100,000, and 35 percent of taxable income exceeding $100,000.

Subtitle B: Increase in Amount of Personal Exemption and Zero Bracket Amount - Increases the amount of the personal exemption to $2,000. Increases the zero bracket amount to $2,600 for single taxpayers and $3,300 for a joint return or surviving spouse. Provides for an annual adjustment in the personal exemption and the zero bracket amount by a cost-of-living adjustment based on the Consumer Price Index.

Repeals the exemption for dependents who are students over the age of 18.

Subtitle C: Employment Income Exclusion Established - Allows an individual taxpayer to exclude 20 percent of the amount received during the taxable year by such individual as employment income. Provides that the exclusion shall be phased out when the individual's wages and salaries exceed the Federal Insurance Compensation Act's maximum wage base for the calendar year. Excludes all of an individual's employment income where the employment income for the taxable year is $10,000 or less ($15,000 or less in the case of a joint return).

Provides for an annual adjustment in the employment income exclusion by a cost-of-living adjustment based on the Consumer Price Index.

Subtitle D: Repeals Related to Reduction in Rates - Repeals provisions relating to: (1) tax tables for individuals; (2) special averaging rules for lump-sum distributions; (3) accumulated corporate surplus; (4) personal holding companies; (5) income averaging; and (6) graduated corporate tax rates. Applies the trust throwback rules only to amounts distributed from a foreign trust.

Title II: Base Broadening - Subtitle A: Credits - Repeals the following income tax credits: (1) the credit for household and dependent care services; (2) the credit for the elderly and the permanently and totally disabled; (3) the residential energy credit; (4) the credit for contributions to candidates for public office; (5) the credit for clinical testing expenses for certain drugs; (6) the credit for producing fuel from nonconventional sources; (7) the credit for increasing research activities; (8) the credit for work incentive expenses; (9) the credit for alcohol used as fuel; (10) the employee stock ownership credit; (11) the general tax credit; (12) the investment credit for depreciable property; (13) the credit for employment of certain new employees; and (14) credit for interest paid with respect to qualified mortgage credit certificate program.

Subtitle B: Exclusions - Repeals the tax exclusion for: (1) compensation for injuries or sickness; (2) dividends received by individuals; (3) amounts received under qualified group legal service plans; (4) qualified transportation furnished by employer; and (5) dividend reinvestment in public utilities.

Modifies the method to be followed in calculating the earned income credit. Provides for an annual adjustment in the earned income credit by a cost-of-living adjustment based on the Consumer Price Index.

Treats as taxable income: (1) unemployment compensation; (2) the annual increase in the cash surrender value of life insurance policies; and (3) interest on industrial development bonds and mortgage subsidy bonds.

Includes in the gross income of a taxpayer any income attributable to an annuity, life insurance, or endowment contract owned by such individual. Requires the insurance company to report to the owner of such contract and the Secretary of the Treasury information necessary to calculate such income.

Provides a limited exclusion from income for scholarships and fellowships.

Amends the Merchant Marine Act to repeal the tax exemption for deposits into, and withdrawals from, a capital construction fund.

Reduces the amount of social security benefits and railroad retirement benefits which must be included in the gross income of the taxpayer for the taxable year.

Subtitle C: Deductions - Repeals the tax deductions for: (1) casualty and theft losses; (2) unused business credits; and (3) two-earner married couples. Repeals the deduction for State and local income, sales, and personal property taxes. Increases the floor on the deduction for medical and dental expenses from five to ten percent. Repeals the deduction for consumer interest.

Subtitle D: Adjustment to Basis: Changes in Certain Special Capital Gains Treatment Provisions - Allows an inflation adjustment, based on the gross national product deflator, to the adjusted basis of capital assets which have been held for more than one year at the time of sale or exchange solely for the purpose of determining gain or loss on such assets. Excludes from such treatment: (1) creditor's interest; (2) options; (3) net lease property in the case of the lessor; (4) preferred stock with fixed dividends; and (5) stock in small business corporations or certain foreign corporations.

Provides procedures for determining the adjusted basis of recovery property for purposes of calculating the gain on the disposition of recovery property. Allows the taxpayer to elect not to use the indexed basis in determining the gain or loss from the sale of recovery property.

Allows the Secretary of the Treasury to disallow all or part of an adjustment where there was a transfer to increase the inflation adjustment or depreciation allowance.

Modifies the alternative minimum tax for corporations by providing that the net capital gain on the sale or exchange of any capital asset shall be taxed at a rate of 20 percent in the case of the sale of a non-indexed asset or an asset to which an election has been made to not treat the asset as an indexed asset. Excludes 40 percent of the amount of the net capital gain from an individual's income where the net capital gain is derived from the sale of an asset which is not indexed or an election is made not to treat the basis as indexed.

Repeals the limitation allowing a deduction for capital losses only to the extent of certain net losses over net gains for individuals. Permits the carryover of the excess of such losses over gross income to the succeeding taxable year.

Title III: Capital Cost Recovery - Subtitle A: Neutral Cost Recovery System for Depreciable Property - Establishes seven categories of recovery property for purposes of determining the recovery period for each class of property.

Provides a procedure for calculating the amount of the deduction for recovery property which includes an inflation adjustment.

Provides that research and experimental expenditures shall be treated in the same manner as other items of recovery property. Allows the Secretary of the Treasury to prescribe by regulation the class of property to which these expenditures shall be assigned.

Subtitle B: Other Changes - Repeals the income tax deductions for: (1) research and experimental expenditures; (2) soil and water conservation expenditures; (3) depreciation or amortization of improvements made by a lessee on a lessor's property; (4) expenditures by farmers for clearing land; and (5) amortization of reforestation expenditures.

Allows a ten-year period for the amortization of construction period interest and taxes.

Allows a deduction for circulation expenses for a newspaper, magazine, or other periodical ratably over a five-year period. Excludes amounts chargeable to a capital account from such treatment.

Repeals the timber depletion deduction.

Title IV: Miscellaneous Provisions - Subtitle A: Foreign Income -

Repeals the exclusion of foreign trade income from gross income for taxable years beginning after December 31, 1985.

Repeals the domestic international sales corporations (DISC) provisions for taxable years beginning after December 31, 1985.

Subtitle B: Other Miscellaneous Provisions - Requires farmers to compute their taxable income using the accrual method of accounting with the capitalization of preproduction expenses. Exempts taxpayers who do not have gross receipts of $1,000,000. Requires farming syndicates to use the accrual method of accounting without regard to gross receipts.

Requires the recognition of the gain or loss on distributions of property by corporations.

Eliminates the special bad debt reserves of financial institutions.

Reduces the percentage by which Social Security benefits must be reduced for income earned above certain amounts. Repeals the earnings reduction test for taxable years beginning after December 31, 1989.

Directs the Secretary of the Treasury to modify the withholding tables to reflect the changes in the tax base reflected in the provisions of this Act.

Title V: Effective Dates - Sets forth the effective dates of the provisions of this Act.