| TEFRA | September 3, 1982, President Reagan — rolled back scheduled depreciation; merged the minimum taxes into one AMT; new compliance rules |
| Social Security Amendments | April 20, 1983, President Reagan — up to 50% of benefits taxable above $25,000 / $32,000 |
| DEFRA | July 18, 1984, President Reagan — the luxury-auto and listed-property rules; section 132 fringe benefits |
| Still with us | Taxation of Social Security, at the same unindexed thresholds; backup withholding; the auto depreciation caps; the fringe benefit rules |
Why it happened
The 1981 rate cuts and the 1981–82 recession together pushed the deficit sharply higher, and revenue fell. Two years in a row, Congress passed deficit-reduction laws that trimmed what 1981 had promised. In the middle came a different emergency: the Social Security trust fund was months from being unable to pay full benefits, and a bipartisan commission chaired by Alan Greenspan produced a rescue that both parties enacted.
1982: TEFRA
- The faster depreciation scheduled for 1985 and 1986 was cancelled before it began, and the “safe-harbor leasing” that let companies sell their unused deductions was repealed.
- The 1969 minimum tax and the 1978 alternative minimum tax were merged into a single AMT at 20%.
- Withholding on interest and dividends, set for 1983, was repealed before it started after a campaign by the banks — and replaced by backup withholding for anyone who does not give a taxpayer identification number, still the rule today at 24%.
- More information reporting, higher penalties, tip reporting by restaurants, and a new system for auditing partnerships once at the entity level.
- Cigarette and telephone excise taxes raised; pension limits cut.
1983: Social Security benefits taxed
Until 1984, Social Security benefits were simply not income. The 1983 amendments made up to 50% of benefits taxable when a retiree’s “provisional income” — adjusted gross income plus tax-exempt interest plus half the benefits — exceeded $25,000 for a single person or $32,000 for a couple. The revenue went back to the trust fund. The same law accelerated the payroll tax increases, raised the full retirement age gradually from 65 to 67, and brought new federal employees into the system.
The thresholds were deliberately not indexed. At enactment about one retiree in ten paid tax on benefits. The 1993 law added a second tier at 85%, also unindexed. Today roughly half of beneficiaries pay tax on some of their Social Security, and the $25,000 and $32,000 figures are the same ones written in 1983. This is the rule behind our page on how Social Security is taxed and the reason the question comes up in nearly every retiree’s return.
1984: DEFRA
- The 15% interest exclusion from 1981 was repealed before its 1985 start.
- The depreciation period for buildings was lengthened from 15 to 18 years (and to 27.5 and 31.5 years in 1986).
- Luxury automobiles and listed property. Section 280F capped annual depreciation on a business car and required a log for cars, computers and similar property used for both business and personal purposes. Every mileage log kept since then traces to this law.
- Statutory rules for fringe benefits (section 132): which employee perks are tax-free and which are wages.
- Below-market loan rules, so that an interest-free loan to a family member or shareholder is treated as if interest were paid.
- The capital gains holding period cut to six months (restored to a year in 1986); the earned income credit raised.
What it meant
A retiree with a pension and some investment income found, on the 1984 return, that part of his Social Security was taxable for the first time — and because the thresholds have never moved, a rule that reached one retiree in ten reaches about half today. A small business owner buying a car after 1984 kept a mileage log and lived with annual depreciation caps. And a business that had planned on the faster write-offs promised in 1981 never got them.