That's a PC issue. This thread is for consoles, check for a thread on that here: http://forums.terraria.org/index.php?forums/pc-bug-reports.113/Chat text auto breaks into the next chat line when too many characters are reached, however the character count in each string does not take into consideration the chat colour and item tags, resulting in very short lines of text being broken into serveral lines, making it very ugly to read, specially in multi player.
Also, tags don't work in a players name/chat, but do work in status messages from the server.
Or post your own thread if none exists.