Fair Tax Act of 1985

Fair 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 flat tax rate of 14 percent on the taxable income of individuals. Imposes a surtax of 12 and 16 percent of the amount by which adjusted gross income exceeds specified levels. Imposes a flat tax rate of 30 percent on the taxable income of estates and trusts. Imposes a flat tax rate of 30 percent on the taxable income of corporations.

Subtitle B: Increase in Personal Exemption for Taxpayer and Standard Deduction - Increases the personal exemption to $1,600 for an individual taxpayer and spouse and to $1,800 for an individual who is a head of a household. Raises the standard deduction to $6,000 in the case of a joint return or a surviving spouse or $3,000 in the case of an individual or a married individual filing a separate return.

Subtitle C: Repeals Related to Reduction in Rates - Repeals provisions relating to: (1) tax tables for individuals; (2) minimum tax for tax preferences; (3) personal service corporations; (4) special averaging rules for lump-sum distributions; (5) accumulated corporate surplus; (6) personal holding companies; (7) income averaging; and (8) graduated corporate tax rates. Repeals the indexing of tax rates. Applies the trust throwback rules only to amounts distributed from foreign trusts.

Title II: Base Broadening-Subtitle A: Credits - Repeals the general tax credit, the investment tax credit, the possessions tax credit and the income tax credits relating to: (1) the elderly and the permanently and totally disabled; (2) contributions to candidates for public office; (3) home purchases; (4) residential energy conservation; (5) producing fuel from a nonconventional source; (6) alcohol used as fuel; (7) increasing research activities; (8) employee stock ownership; and (9) clinical testing for certain drugs.

Allows an income tax deduction for household and dependent care expenses necessary for employment. (Present law allows an income tax credit for such expenses.)

Subtitle B: Exclusions - Repeals the partial income tax exclusion for interest and dividends. Repeals the exclusion for: (1) qualified transportation furnished by an employer; (2) cafeteria plans furnished by an employer; (3) dependent care assistance programs; (4) dividend reinvestment in public utilities; (5) payments to encourage mining for defenses purposes; (6) earned income of citizens living abroad; (7) certain allowances; (8) income earned from sources within possessions of the United States; and (9) income earned from sources within Puerto Rico.

Treats as taxable income: (1) amounts paid by an employer for group-term life insurance; (2) unemployment compensation; (3) the annual increase in the cash surrender value of life insurance policies; (4) interest on industrial development bonds and mortgage subsidy bonds; and (5) amounts contributed by an employer to accident and health plans.

Provides a limited exclusion from income for scholarships and fellowships.

Imposes the surtax on the gain from the sale of a principal residence.

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

Subtitle C: Deductions - Repeals the deduction for two-earner married couples and the deduction for adoption expenses.

Limits the amount of the interest deduction for individuals.

Repeals the deduction for State and local personal property and sales taxes.

Restricts the charitable contribution for corporations to 50 percent of the charitable contributions made during the year.

Increases the floor on the deduction for medical and dental expenses from five percent to ten percent.

Subtitle D: Repeal of Special Capital Gains Treatment - Repeals the alternative tax on capital gains for corporations and the deduction for individuals for capital gains. Limits the amount of the capital loss deduction without regard to distinctions between short term and long term capital losses. Eliminates the distinction between short-term and long-term gains and losses.

Title III: Capital Cost Recovery-Subtitle A: Simplified Cost Recovery Systems - Allows individuals and corporations a deduction from gross income for a percentage of the balance in a recovery account for each year. Includes in the recovery account the cost of recovery property which is depreciable property used in a trade or business or held for the production of income which is placed in service after December 31, 1986.

Establishes six classes of recovery property and specifies a class life for each. Assigns property to each class according to the class life of the property.

Sets forth rules for the calculation of the recovery percentage on the basis of the class life of the property.

Allows individuals and corporations a deduction for depletable property determined as a percentage of the balance in a recovery account for each year. Establishes six classes of depletable property and assigns a class life to each. Assigns a ten-year class life for oil, gas, and geothermal wells.

Subtitle B: Other Changes - Repeals the income tax deductions for: (1) intangible drilling and development costs for oil, gas, and geothermal wells; (2) depreciation; (3) amortization of pollution control facilities; (4) improvements made by a lessee on a lessor's property; (5) certain depreciable assets; (6) amortization of reforestation expenditures; (7) percentage depletion; (8) development expenditures; and (9) mining and exploration expenditures.

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

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

Provides for the deduction of 50 percent of tertiary injectant expenses in the taxable year and 50 percent of such expenses in the succeeding taxable year.

Title IV: Miscellaneous Provisions - Subtitle A: Foreign Income - Requires an individual who owns stock in a corporation which is a controlled foreign corporation to include in income a pro rata share of the corporations's earnings and profits for such year. Reduces such amount by any amount required to be included in income by reason of the amount being foreign personal holding company income.

Repeals the foreign sales corporations (FSC) provisions for taxable years beginning after December 31, 1986. Repeals the domestic international sales corporations (DISC) provisions for taxable years beginning after December 31, 1986.

Subtitle B: Other Miscellaneous Provisions - Repeals the tax exemption for credit unions.

Reduces the limit on benefits which may be paid to a participant under defined benefit plans and defined contribution plans. Repeals the cost-of-living adjustment for defined benefit plans. Continues the cost-of-living adjustment for purposes of calculating a participant's average compensation for his or her high three years.

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 exceeding $1,000,000. Requires farming syndicates to use the accrual method of accounting without regard to gross receipts.

Provides that farmers who must use the accrual method cannot expense the following: (1) soil and water conservation expenditures; (2) fertilizer; and (3) expenses for clearing land.

Requires the deferral of income or loss must be taken into account in determining tax liability under completed contract method of accounting.

Requires that the taxpayer with adjusted gross income in excess of $100,000 must make estimated payments equal to 90 percent of current year tax.

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

Eliminates the special bad debt reserves of financial institutions.

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