Tax Reduction Act of 1981

Tax Reduction Act of 1981 - Title I: Individual Income Taxes - Amends the Internal Revenue Code to reduce income tax rates for individuals and for estates and trusts beginning in 1982. Reduces the lowest marginal rate from 14 to 12 percent beginning in 1982. Reduces the highest rate from 70 to 60 percent beginning in 1981 and from 60 to 50 percent beginning in 1982.

Increases 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.

Reduces the personal holding company tax from 70 percent to 60 percent in 1981 and from 60 percent to 50 percent in 1982.

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

Increases the rate of the earned income tax credit from 10 to 11 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 10 percent of the lesser of $40,000 or the earned income of the lower income spouse.

Title II: Corporate Income Taxes - Subtitle A - Cost Recovery Provisions - Amends the Internal Revenue Code to provide an accelerated method of depreciation for depreciable personal property which is placed in service after December 31, 1980. Assigns such property to one of four classes based on present class lives under the Asset Depreciation Range (ADR) system. Allows 92.7 to 98.5 percent depreciation of such property in the current taxable year based upon the class to which it is assigned. Excludes certain types of property from accelerated depreciation treatment.

Provides for depreciation of certain real property placed in service after December 31, 1980, according to the straight line method based on a useful life of 20 years. Specifies a 15 year useful life for low-income housing.

Permits the expensing (i.e., deducting in current taxable year) of up to $25,000 of depreciable business assets, in lieu of current provisions allowing additional first year depreciation of such assets.

Allows a 30 percent variance from class life for long-life public utility property and certain real property.

Disqualifies any property depreciated under the terms of this Act for investment tax credit treatment.

Subtitle B - Research and Experimental Expenditures - Allows a nonrefundable income tax credit of the sum of 25 percent of the qualified research or experimental expenditures and 25 percent of the qualified higher education research or experimental expenditures. Defines "qualified research and experimental expenditures" as those business-related expenditures which are deductible under current provisions of the Internal Revenue Code. Defines "qualified higher education research and experimental expenditures" as amounts paid during a taxable year to any institution of higher education for a planned search, investigation, or experimentation to the extent that such amounts do not exceed 5 percent of the taxable income of the taxpayer for such year.

Limits the scope of such expenditures, for both the tax credit and tax deduction, to technological research designed to develop or improve products or services. Excludes expenditures for research or experimentation in the social sciences or humanities, government-funded research, and certain applied research.

Limits the amount of expenditures eligible for the credit to those which exceed the annual average of such expenditures for the immediately preceding three years. Requires taxpayers under common control to aggregate such expenditures for purposes of computing the credit. Sets forth rules for adjusting such expenditure amounts when there is a change in business ownership. Provides for a three- year carryback and seven-year carryover of unused credits.

Title III: Retirement Plans - Increases the amount of the income tax deduction for contributions to an individual retirement account from $1,500 to $2,000. Allows a $1,000 maximum deduction for active participants in employer pension plans. Increases the income tax deduction for contributions to a self-employment pension plan from $7,500 to $15,000.