Middle Income Tax Relief Act of 1995

Summary: Middle Income Tax Relief Act of 1995 - Amends the Internal Revenue Code to allow a capital gains deduction for individuals of 50 percent of the qualified gain for the taxable year.  Limits such gain to $400,000 reduced by the aggregate amount of such gain taken into account for prior years. Makes such deduction unavailable to taxpayers with gross incomes in excess of $250,000.  Requires property sold or exchanged for such gain to have been held in excess of three years.

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Middle Income Tax 
Relief Act of 1995''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. REDUCTION IN CAPITAL GAINS TAX FOR INDIVIDUALS.

    (a) General Rule.--Part I of subchapter P of chapter 1 (relating to 
treatment of capital gains) is amended by adding at the end thereof the 
following new section:

``SEC. 1203. CAPITAL GAINS DEDUCTION FOR INDIVIDUALS.

    ``(a) In General.--In the case of an individual, there shall be 
allowed as a deduction for the taxable year the capital gains deduction 
(if any) determined under subsection (b).
    ``(b) Lifetime Capital Gains Bank.--
            ``(1) In general.--For purposes of subsection (a), the 
        capital gains deduction determined under this subsection for 
        any taxable year is 50 percent of the qualified gain for such 
        taxable year.
            ``(2) Limitations.--
                    ``(A) Lifetime limit.--The amount of the qualified 
                gain taken into account under paragraph (1) for any 
                taxable year shall not exceed $400,000 reduced by the 
                aggregate amount of the qualified gain taken into 
                account under this subsection by the taxpayer for prior 
                taxable years.
                    ``(B) Deduction not available to taxpayers with 
                adjusted gross income in excess of $250,000.--In the 
                case of a taxpayer with adjusted gross income of 
                $200,000 or greater, the deduction determined under 
                this subsection shall be reduced (but not below zero) 
                by an amount which bears the same ratio to the amount 
                of such deduction as--
                            ``(i) the adjusted gross income of the 
                        taxpayer for the taxable year in excess of 
                        $200,000, bears to
                            ``(ii) $50,000.
            ``(3) Qualified gain.--
                    ``(A) In general.--For purposes of paragraph (1), 
                the term `qualified gain' means the lesser of--
                            ``(i) the net capital gain on the sale or 
                        exchange of a qualified asset for the taxable 
                        year, or
                            ``(ii) the net capital gain for the taxable 
                        year determined by only taking into account 
                        gains and losses from sales and exchanges on or 
                        after January 1, 1995, of qualified assets.
                    ``(B) Special rules.--
                            ``(i) For purposes of subparagraph (A)(ii), 
                        any amount treated as a capital loss for the 
                        taxable year under section 1212 shall be 
                        treated as a loss from a sale or exchange on or 
                        after January 1, 1995, of a qualified asset.
                            ``(ii) A taxpayer may elect for any taxable 
                        year not to take into account under this 
                        subsection all (or any portion) of the 
                        qualified gain for such taxable year. Such an 
                        election, once made, shall be irrevocable.
            ``(4) Qualified assets.--For purposes of this subsection, 
        the term `qualified asset' means any capital asset (within the 
        meaning of section 1221), except that such term shall not 
        include any collectible (as defined in section 408(m) without 
        regard to paragraph (3) thereof).
            ``(5) Subsection not to apply in certain cases.--This 
        subsection shall not apply in the case of--
                    ``(A) sales or exchanges to related persons (within 
                the meaning of section 267(b) or 707(b)(1));
                    ``(B)(i) an individual who has not attained the age 
                of 25 before the close of the taxable year;
                            ``(ii) a married individual (within the 
                        meaning of section 7703) filing a separate 
                        return for the taxable year; or
                            ``(iii) an estate or trust.
    ``(c) Special Rules.--
            ``(1) Gain on sale or exchange of real property determined 
        by reference to indexed basis.--
                    ``(A) In general.--For purposes of determining, 
                under this section, the amount of the qualified gain 
                from the sale or exchange of real property, the indexed 
                basis of the property shall be substituted for its 
                adjusted basis.
                    ``(B) Indexed basis.--For purposes of this 
                section--
                            ``(i) Indexed basis.--The indexed basis for 
                        any real property described in subparagraph (A) 
                        is--
                                    ``(I) the adjusted basis of the 
                                property, multiplied by
                                    ``(II) the applicable inflation 
                                ratio.
                            ``(ii) Applicable inflation ratio.--The 
                        applicable inflation ratio for any real 
                        property described in subparagraph (A) is the 
                        percentage derived by dividing--
                                    ``(I) the CPI for the calendar 
                                month in which the disposition takes 
                                place, by
                                    ``(II) the CPI for the calendar 
                                month in which the property was 
                                acquired by the taxpayer.
                        The applicable inflation ratio shall not be 
                        taken into account unless it is greater than 1. 
                        The applicable inflation ratio for any asset 
                        shall be rounded to the nearest \1/10\ of 1 
                        percent.
                            ``(iii) CPI for calendar month.--The CPI 
                        for any calendar month is the Consumer Price 
                        Index (as defined in section 1(f)(5)) for such 
                        month.
                    ``(C) Real property.--For purposes of this 
                paragraph, the term `real property' means land and any 
                section 1250 property (within the meaning of section 
                1250(c)).
            ``(2) Treatment of certain sales of interests in 
        partnerships, etc.--For purposes of subsection (b), any gain 
        from the sale or exchange of a qualified asset which is an 
        interest in a partnership, S corporation, or trust shall not be 
        treated as gain from the sale or exchange of a qualified asset 
        to the extent such sale gain is attributable to unrealized 
        appreciation in the value of property described in subsection 
        (b)(4) which is held by such entity. Rules similar to the rules 
        of section 751(f) shall apply for purposes of the preceding 
        sentence.
            ``(3) Deduction only available for certain sales or 
        exchanges.--
                    ``(A) Sale or exchange must occur after december 
                31, 1994.--The amount of the net capital gain taken 
                into account under subsection (b)(3)(A) shall not 
                exceed the amount of the net capital gain determined by 
                only taking into account gains and losses from sales 
                and exchanges on or after January 1, 1995. For purposes 
                of the preceding sentence, any amount treated as a 
                capital loss for the taxable year under section 1212 
                shall be treated as a loss from a sale or exchange on 
                or after such date.
                    ``(B) Required holding period must be satisfied.--
                No gain shall be taken into account under subsection 
                (b)(3)(A) unless the holding period of the property 
                sold or exchanged (determined under the principles of 
                section 1223) exceeds 3 years.
            ``(4) Determination of adjusted gross income.--
                    ``(A) In general.--For purposes of subsection (b), 
                adjusted gross income shall be determined--
                            ``(i) without regard to the deduction 
                        allowed under this section, but
                            ``(ii) after the application of sections 
                        86, 135, 219, and 469.
                    ``(B) Coordination with other adjusted gross income 
                limitations.--For purposes of the sections listed in 
                subparagraph (A)(ii), adjusted gross income shall be 
                determined without regard to the deduction allowed 
                under this section.
            ``(5) Special rule for pass-thru entities.--
                    ``(A) In general.--In applying this section with 
                respect to any pass-thru entity, the determination of 
                when the sale or exchange occurs shall be made at the 
                entity level.
                    ``(B) Pass-thru entity defined.--For purposes of 
                subparagraph (A), the term `pass-thru-entity' means--
                            ``(i) a regulated investment company,
                            ``(ii) a real estate investment trust,
                            ``(iii) an S corporation,
                            ``(iv) a partnership,
                            ``(v) an estate or trust, and
                            ``(vi) a common trust fund.''.
    (b) Coordination With Minimum Tax.--Paragraph (1) of section 56(b) 
is amended by adding at the end the following new subparagraph:
                    ``(G) Capital gains deduction not allowed.--The 
                deduction under section 1203 shall not be allowed.''.
    (c) Coordination With Maximum Capital Gains Rate.--Subsection (h) 
of section 1 (relating to maximum capital gains rate) is amended to 
read as follows:
    ``(h) Maximum Capital Gains Rate.--
            ``(1) In general.--If a taxpayer has a net capital gain for 
        any taxable year, then the tax imposed by this section shall 
        not exceed the sum of--
                    ``(A) a tax computed at the rates and in the same 
                manner as if this subsection had not been enacted on 
                the greater of--
                            ``(i) taxable income reduced by the amount 
                        of the net capital gain, or
                            ``(ii) the amount of taxable income taxed 
                        at a rate below 28 percent, plus
                    ``(B) a tax of 28 percent of the amount of taxable 
                income in excess of the amount determined under 
                subparagraph (A).
        For purposes of the preceding sentence, the net capital gain 
        for any taxable year shall be reduced (but not below zero) by 
        the amount which the taxpayer elects to take into account as 
        investment income for the taxable year under section 
        163(d)(4)(B)(iii).
            ``(2) Coordination with section 1203 deduction.--For 
        purposes of paragraph (1), the amount of the net capital gain 
        shall be reduced by the amount allowable as a deduction under 
        section 1203(a).''.
    (d) Conforming amendments.--
            (1) Subsection (a) of section 62 is amended by inserting 
        after paragraph (15) the following new paragraph:
            ``(16) Capital gains deduction.--The deduction allowed by 
        section 1203.''
            (2) Subclause (I) of section 163(d)(4)(B)(i) is amended by 
        inserting ``, reduced by the amount of any deduction allowable 
        under section 1203 attributable to gain for such property'' 
        after ``investment''.
            (3)(A) Paragraph (2) of section 172(d) is amended to read 
        as follows:
            ``(2) Capital gains and losses of taxpayers other than 
        corporations.--In the case of a taxpayer other than a 
        corporation--
                    ``(A) the amount deductible on account of losses 
                from sales or exchanges of capital assets shall not 
                exceed the amount includible on account of gains from 
                sales or exchanges of capital assets;
                    ``(B) the exclusion provided by section 1202 shall 
                not be allowed; and
                    ``(C) the deduction provided by section 1203 shall 
                not be allowed.''.
                    (B) Subparagraph (B) of section 172(d)(4) is 
                amended by inserting ``(2)(C),'' after ``(2)(B),''.
            (4)(A) Section 220 (relating to cross reference) is amended 
        to read as follows:

``SEC. 220. CROSS REFERENCES.

                                ``(1) For deduction for net capital 
gains in the case of a taxpayer other than a corporation, see section 
1203.
                                ``(2) For deductions in respect of a 
decedent, see section 691.''
            (B) The table of sections for part VII of subchapter B of 
        chapter 1 is amended by striking ``reference'' in the item 
        relating to section 220 and inserting ``references''.
            (5) Paragraph (4) of section 691(c) is amended by inserting 
        ``1203,'' after ``1202,''.
            (6) The second sentence of paragraph (2) of section 871(a) 
        is amended by striking ``section 1202'' and inserting 
        ``sections 1202 and 1203''.
            (7) Paragraph (1) of section 1402(i) is amended to read as 
        follows:
            ``(1) In general.--In determining the net earnings from 
        self-employment of any options dealer or commodities dealer--
                    ``(A) notwithstanding subsection (a)(3)(A), there 
                shall not be excluded any gain or loss (in the normal 
                course of the taxpayer's activity of dealing in or 
                trading section 1256 contracts) from section 1256 
                contracts or property related to such contracts, and
                    ``(B) the deduction provided by section 1203 shall 
                not apply.''.
    (e) Clerical Amendment.--The table of sections for part I of 
subchapter P of chapter 1 is amended by adding at the end thereof the 
following new item:

                              ``Sec. 1203. Capital gains deduction for 
                                        individuals.''
    (f) Effective Dates.--The amendments made by this section shall 
apply to taxable years ending after December 31, 1994.