To amend the Internal Revenue Code of 1986 to permit a husband and wife to file a combined return to which separate tax rates apply.

Summary: Marriage Penalty Relief Act - Amends the Internal Revenue Code (the Code) to permit a husband and wife to make a combined return of income taxes under which: (1) a separate taxable income is determined for each spouse by applying the rules provided in this Act; and (2) the tax imposed by section 1 (tax rates on individuals) of the Code is the aggregate amount resulting from applying the separate rates set forth in section 1(c) (rates applicable to unmarried individuals) to each such taxable income.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Marriage Penalty Relief Act''.

SEC. 2. COMBINED RETURN TO WHICH UNMARRIED RATES APPLY.

    (a) In General.--Subpart B of part II of subchapter A of chapter 61 
of the Internal Revenue Code of 1986 (relating to income tax returns) 
is amended by inserting after section 6013 the following new section:

``SEC. 6013A. COMBINED RETURN WITH SEPARATE RATES.

    ``(a) General Rule.--A husband and wife may make a combined return 
of income taxes under subtitle A under which--
            ``(1) a separate taxable income is determined for each 
        spouse by applying the rules provided in this section, and
            ``(2) the tax imposed by section 1 is the aggregate amount 
        resulting from applying the separate rates set forth in section 
        1(c) to each such taxable income.
    ``(b) Treatment of Income.--For purposes of this section--
            ``(1) earned income (within the meaning of section 911(d)), 
        and any income received as a pension or annuity which arises 
        from an employer-employee relationship, shall be treated as the 
        income of the spouse who rendered the services,
            ``(2) income from property shall be divided between the 
        spouses in accordance with their respective ownership rights in 
        such property (equally in the case of property held jointly by 
        the spouses), and
            ``(3) any exclusion from income shall be allowable to the 
        spouse with respect to whom the income would be otherwise 
        includible.
    ``(c) Treatment of Deductions.--For purposes of this section--
            ``(1) except as otherwise provided in this subsection, the 
        deductions described in section 62(a) shall be allowed to the 
        spouse treated as having the income to which such deductions 
        relate,
            ``(2) the deductions allowable by section 151(b) (relating 
        to personal exemptions for taxpayer and spouse) shall be 
        determined by allocating 1 personal exemption to each spouse,
            ``(3) section 63 shall be applied as if such spouses were 
        not married, except that the election whether or not to itemize 
        deductions shall be made jointly by both spouses and apply to 
        each, and
            ``(4) each spouse's share of all other deductions shall be 
        determined by multiplying the aggregate amount thereof by the 
        fraction--
                    ``(A) the numerator of which is such spouse's gross 
                income, and
                    ``(B) the denominator of which is the combined 
                gross incomes of the 2 spouses.
Any fraction determined under paragraph (4) shall be rounded to the 
nearest percentage point.
    ``(d) Treatment of Credits.--For purposes of this section--
            ``(1) In general.--Except as provided in paragraph (2), 
        each spouse's share of credits allowed to both spouses shall be 
        determined by multiplying the aggregate amount of the credits 
        by the fraction determined under subsection (c)(4).
            ``(2) Earned income credit.--The earned income credit under 
        section 32 shall be determined as if each spouse were a 
        separate taxpayer, except that--
                    ``(A) the earned income and the modified adjusted 
                gross income of each spouse shall be determined under 
                the rules of subsections (b), (c), and (e), and
                    ``(B) qualifying children shall be allocated 
                between spouses proportionate to the earned income of 
                each spouse (rounded to the nearest whole number).
    ``(e) Special Rules Regarding Income Limitations.--
            ``(1) Exclusions and deductions.--For purposes of making a 
        determination under subsection (b) or (c), any eligibility 
        limitation with respect to each spouse shall be determined by 
        taking into account the limitation applicable to a single 
        individual.
            ``(2) Credits.--For purposes of making a determination 
        under subsection (d)(1), in no event shall an eligibility 
        limitation for any credit allowable to both spouses be less 
        than twice such limitation applicable to a single individual.
    ``(f) Special Rules for Alternative Minimum Tax.--If a husband and 
wife elect the application of this section--
            ``(1) the tax imposed by section 55 shall be computed 
        separately for each spouse, and
            ``(2) for purposes of applying section 55--
                    ``(A) the rules under this section for allocating 
                items of income, deduction, and credit shall apply, and
                    ``(B) the exemption amount for each spouse shall be 
                the amount determined under section 55(d)(1)(B).
    ``(g) Treatment as Joint Return.--Except as otherwise provided in 
this section or in the regulations prescribed hereunder, for purposes 
of this title (other than sections 1 and 63(c)) a combined return under 
this section shall be treated as a joint return.
    ``(h) Phase-In of Benefit.--
            ``(1) In general.--In the case of any taxable year 
        beginning before January 1, 2004, the tax imposed by section 1 
        or 55 shall in no event be less than the sum of--
                    ``(A) the tax determined after the application of 
                this section, plus
                    ``(B) the applicable percentage of the excess of--
                            ``(i) the tax determined without the 
                        application of this section, over
                            ``(ii) the amount determined under 
                        subparagraph (A).
            ``(2) Applicable percentage.--For purposes of paragraph 
        (1), the applicable percentage shall be determined in 
        accordance with the following table:

                                                         The applicable
``For taxable years beginning in:                        percentage is:
    2002..........................................                  50 
    2003..........................................                  10.
    ``(i) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out this section.''.
    (b) Unmarried Rate Made Applicable.--So much of subsection (c) of 
section 1 of the Internal Revenue Code of 1986 as precedes the table is 
amended to read as follows:
    ``(c) Separate or Unmarried Return Rate.--There is hereby imposed 
on the taxable income of every individual (other than a married 
individual (as defined in section 7703) filing a return which is not a 
combined return under section 6013A, a surviving spouse as defined in 
section 2(a), or a head of household as defined in section 2(b)) a tax 
determined in accordance with the following table:''.
    (c) Penalty for Substantial Understatement of Income From 
Property.--Section 6662 of the Internal Revenue Code of 1986 (relating 
to imposition of accuracy-related penalty) is amended--
            (1) by adding at the end of subsection (b) the following:
            ``(6) Any substantial understatement of income from 
        property under section 6013A.'', and
            (2) by adding at the end the following new subsection:
    ``(i) Substantial Understatement of Income From Property Under 
Section 6013A.--For purposes of this section, there is a substantial 
understatement of income from property under section 6013A if--
            ``(1) the spouses electing the treatment of such section 
        for any taxable year transfer property from 1 spouse to the 
        other spouse in such year,
            ``(2) such transfer results in reduced tax liability under 
        such section, and
            ``(3) the significant purpose of such transfer is the 
        avoidance or evasion of Federal income tax.''.
    (d) Protection of Social Security and Medicare Trust Funds.--
            (1) In general.--Nothing in this section shall be construed 
        to alter or amend the Social Security Act (or any regulation 
        promulgated under that Act).
            (2) Transfers.--
                    (A) Estimate of secretary.--The Secretary of the 
                Treasury shall annually estimate the impact that the 
                enactment of this section has on the income and 
                balances of the trust funds established under sections 
                201 and 1817 of the Social Security Act (42 U.S.C. 401 
                and 1395i).
                    (B) Transfer of funds.--If, under subparagraph (A), 
                the Secretary of the Treasury estimates that the 
                enactment of this section has a negative impact on the 
                income and balances of such trust funds, the Secretary 
                shall transfer, not less frequently than quarterly, 
                from the general revenues of the Federal Government an 
                amount sufficient so as to ensure that the income and 
                balances of such trust funds are not reduced as a 
                result of the enactment of this section.
    (e) Clerical Amendment.--The table of sections for subpart B of 
part II of subchapter A of chapter 61 of the Internal Revenue Code of 
1986 is amended by inserting after the item relating to section 6013 
the following:

                              ``Sec. 6013A. Combined return with 
                                        separate rates.''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.