To amend the Internal Revenue Code of 1986 to replace the current earned income credit and the personal exemption for children with a refundable credit for families and a refundable credit for each child, and for other purposes.

Summary: Amends the Internal Revenue Code to replace the existing earned income credit and personal exemption for children with a refundable family credit and a refundable credit for each child under 18 years old.

SECTION 1. EARNED INCOME CREDIT FOR INDIVIDUALS WITH CHILDREN.

    (a) Credit Determined Without Regard to Number of Children.--
Subsections (b) (1) and (2) of section 32 of the Internal Revenue Code 
of 1986 are amended to read as follows:
            ``(1) Percentages.--The credit percentage and the phaseout 
        percentage shall be determined as follows:


------------------------------------------------------------------------
                                        The credit        The phaseout  
         ``In the case of:            percentage is:     percentage is: 
------------------------------------------------------------------------
    An individual not filing a                                          
     joint return.................          15                 11       
    Married individuals filing                                          
     joint return.................         18.5                10       
------------------------------------------------------------------------

            ``(2) Amounts.--The earned income amount and the phaseout 
        amount shall be determined as follows:


------------------------------------------------------------------------
                                    The earned income     The phaseout  
         ``In the case of:              amount is:         amount is:   
------------------------------------------------------------------------
    An individual not filing a                                          
     joint return.................       $11,000            $11,600     
    Married individuals filing                                          
     joint return.................        $9,000           $12,000.''   
------------------------------------------------------------------------

    (b) Definition of Eligible Individual.--Subsection (c)(1)(A) of 
section 32 of such Code (defining eligible individual) is amended to 
read as follows:
                    ``(A) In general.--The term `eligible individual' 
                means any individual who has a qualifying child for the 
                taxable year.''
    (c) Modification of Adjusted Gross Income Definition.--
            (1) In general.--Subsections (a)(2), (c)(1)(C), and 
        (f)(2)(B) of section 32 of such Code are each amended by 
        striking ``adjusted gross income'' and inserting ``modified 
        adjusted gross income''.
            (2) Modified adjusted gross income defined.--Subsection (c) 
        of section 32 of such Code (relating to definitions and special 
        rules) is amended by adding at the end the following new 
        paragraph:
            ``(5) Modified adjusted gross income.--
                    ``(A) In general.--The term `modified adjusted 
                gross income' means adjusted gross income--
                            ``(i) increased by the sum of the amounts 
                        described in subparagraph (B), and
                            ``(ii) determined without regard to--
                                    ``(I) the amounts described in 
                                subparagraph (C), or
                                    ``(II) the deduction allowed under 
                                section 172.
                    ``(B) Nontaxable income taken into account.--
                Amounts described in this subparagraph are--
                            ``(i) Social Security benefits (as defined 
                        in section 86(d)) received by the taxpayer 
                        during the taxable year to the extent not 
                        included in gross income,
                            ``(ii) amounts which--
                                    ``(I) are received during the 
                                taxable year by (or on behalf of) a 
                                spouse pursuant to a divorce or 
                                separation instrument (as defined in 
                                section 71(b)(2)), and
                                    ``(II) under the terms of the 
                                instrument are fixed as payable for the 
                                support of the children of the payor 
                                spouse (as determined under section 
                                71(c)),
                        but only to the extent such amounts exceed 
                        $6,000,
                            ``(iii) interest received or accrued during 
                        the taxable year which is exempt from tax 
                        imposed by this chapter, and
                            ``(iv) amounts received as a pension or 
                        annuity, and any distributions or payments 
                        received from an individual retirement plan, by 
                        the taxpayer during the taxable year to the 
                        extent not included in gross income.
                Clause (iv) shall not include any amount which is not 
                includible in gross income by reason of section 402(c), 
                403(a)(4), 403(b)(8), 408(d) (3), (4), or (5), or 
                457(e)(10).
                    ``(C) Certain amounts disregarded.--An amount is 
                described in this subparagraph if it is--
                            ``(i) the amount of losses from sales or 
                        exchanges of capital assets in excess of gains 
                        from such sales or exchanges to the extent such 
                        amount does not exceed the amount under section 
                        1211(b)(1),
                            ``(ii) the net loss from the carrying on of 
                        trades or businesses, computed separately with 
                        respect to--
                                    ``(I) trades or businesses (other 
                                than farming) conducted as sole 
                                proprietorships,
                                    ``(II) trades or businesses of 
                                farming conducted as sole 
                                proprietorships, and
                                    ``(III) other trades or business,
                            ``(iii) the net loss from estates and 
                        trusts, and
                            ``(iv) the excess (if any) of amounts 
                        described in subsection (i)(2)(C)(ii) over the 
                        amounts described in subsection (i)(2)(C)(i) 
                        (relating to nonbusiness rents and royalties).
                For purposes of clause (ii), there shall not be taken 
                into account items which are attributable to a trade or 
                business which consists of the performance of services 
                by the taxpayer as an employee.''
    (d) Inflation Adjustments.--
            (1) Adjustment of phaseout amounts.--Paragraph (1) of 
        subsection (i) of section 32 of such Code (relating to 
        inflation adjustments) is amended to read as follows:
            ``(1) Phaseout amounts.--In the case of any taxable year 
        beginning after 1997--
                    ``(A) Individual not filing joint return.--Each 
                dollar amount contained in subsection (b)(2) relating 
                to the phaseout amount for an individual not filing a 
                joint return shall be increased by an amount equal to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) less 2 
                        percentage points (but not less than zero), for 
                        the calendar year in which the taxable year 
                        begins, by substituting `calendar year 1997' 
                        for `calendar year 1992'.
                    ``(B) Joint returns.--Each dollar amount contained 
                in subsection (b)(2) relating to the phaseout amount 
                for married individuals filing a joint return shall be 
                increased by an amount equal to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) plus 1 
                        percentage point, for the calendar year in 
                        which the taxable year begins, by substituting 
                        `calendar year 1996' for `calendar year 
                        1992'.''
            (2) Adjustment of credit percentages.--Subsection (i) of 
        section 32 of such Code (relating to inflation adjustments) is 
        amended by adding at the end the following:
            ``(3) Credit percentages.--In the case of any taxable year 
        beginning after 1997--
                    ``(A) Individual not filing joint return.--The 
                credit percentage contained in subsection (b)(1) for an 
                individual not filing a joint return shall be increased 
                by an amount equal to--
                            ``(i) such credit percentage, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) less 2 
                        percentage points (but not less than zero), for 
                        the calendar year in which the taxable year 
                        begins, by substituting `calendar year 1997' 
                        for `calendar year 1992'.
                    ``(B) Joint returns.--The credit percentage 
                contained in subsection (b)(1) for married individuals 
                filing a joint return shall be increased by an amount 
                equal to--
                            ``(i) such credit percentage, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) plus 1 
                        percentage point, for the calendar year in 
                        which the taxable year begins, by substituting 
                        `calendar year 1996' for `calendar year 1992'.
                    ``(C) Rounding rule.--The percentages determined 
                under subparagraphs (A) and (B) shall be rounded to the 
nearest 1/100th of 1 percent.''

SEC. 2. ELIMINATION OF PERSONAL EXEMPTION FOR DEPENDENTS UNDER 18.

    (a) In General.--Subsection (c) of section 151 of the Internal 
Revenue Code of 1986 is amended by adding at the end the following:
            ``(6) Disallowance for dependent under 18.--
                    ``(A) In general.--An exemption shall be allowed 
                under this section for a dependent only if the 
                dependent has attained the age of 18 as of the close of 
                the calendar year in which the taxable year of the 
                taxpayer begins.
                    ``(B) Coordination with other provisions.--Except 
                as provided in this section, whenever in this title a 
                provision refers to dependents with respect to whom a 
                deduction is provided under this section, such 
                provision shall be applied without regard to 
                subparagraph (A).''
    (b) Conforming Amendment.--Clause (i) of section 151(c)(1)(B) of 
such Code is amended by striking ``has not attained'' and inserting 
``has attained the age of 18 but not''.

SEC. 3. CREDIT FOR CHILDREN UNDER 18.

    (a) In General.--Subpart C of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 (relating to refundable credits) 
is amended by inserting after section 35 the following new section:

``SEC. 35A. CHILDREN UNDER 18.

    ``(a) Allowance of Credit.--
            ``(1) General rule.--There shall be allowed to a taxpayer 
        as a credit against the tax imposed by this subtitle for the 
        taxable year an amount equal to the sum of the child credit 
        amounts for each qualifying child.
            ``(2) Child credit amount.--The child credit amount for a 
        qualifying child is the amount equal to the credit percentage 
        of so much of the taxpayer's earned income as does not exceed 
        the earned income amount with respect to such child.
            ``(3) Limitation.--The child credit amount allowable to a 
        taxpayer under paragraph (1) for a qualifying child for any 
        taxable year shall not exceed the excess (if any) of--
                    ``(A) the credit percentage of the earned income 
                amount with respect to such qualifying child, over
                    ``(B) the sum of the initial phasedown amount and 
                the final phasedown amount.
    ``(b) Percentages and Amounts.--For the purposes of subsection 
(a)--
            ``(1) Credit percentage and earned income amount.--The 
        credit percentage and the earned income amount shall be 
        determined as follows:


------------------------------------------------------------------------
                                        The credit       Earned income  
         ``In the case of:            percentage is:        amount:     
------------------------------------------------------------------------
    1st and 2nd qualifying child..         12.5              $8,000     
    3rd qualifying child..........          4               $25,000     
    4th and each additional                                             
     qualifying child.............         3.33             $30,000     
------------------------------------------------------------------------

            ``(2) Initial phasedown amount.--The initial phasedown 
        amount is the lesser of--
                    ``(A) 5 percent of so much of the modified adjusted 
                gross income (or, if greater, the earned income) of the 
                taxpayer for the taxable year as exceeds $75,000 for an 
                individual not filing a joint return ($110,000 for 
                joint filers), and
                    ``(B) $210.
            ``(3) Final phasedown amount.--
                    ``(A) In general.--The final phasedown amount is 
                the amount which is 2 percentage points for each $2,500 
                (or fraction thereof) by which the taxpayer's adjusted 
                gross income for the taxable year exceeds the threshold 
                amount for the taxable year. In the case of a married 
                individual filing a separate return, the preceding 
                sentence shall be applied by substituting `$1,250' for 
                `$2,500'. In no event shall the applicable percentage 
                exceed 100 percent.
                    ``(B) Threshold amount.--For purposes of 
                subparagraph (A), the term `threshold amount' means the 
                amount determined under section 151(d)(3)(C).
    ``(c) Definitions.--For the purposes of this section--
            ``(1) Earned income.--The term `earned income' has the 
        meaning given such term by section 32(c)(2).
            ``(2) Qualifying child.--The term `qualifying child' has 
        the meaning given such term by section 32(c)(3), except that 
        such term only includes an individual who has not attained the 
        age of 18 at the close of the calendar year in which the 
        taxable year of the taxpayer begins.''
    (b) Clerical Amendment.--The table of sections for subpart C of 
part IV of subchapter A of chapter 1 of the Internal Revenue Code of 
1986 is amended by adding after section 35 the following new item:

                              ``Sec. 35A. Dependents under 18.''
    (c) Conforming Amendment.--Section 6109(e) of such Code (relating 
to identifying numbers) is amended by inserting ``, or a credit under 
section 35A for a dependent under 18 years of age,'' after ``exemption 
under section 151 for any dependent''.

SEC. 4. EFFECTIVE DATE.

    The amendments made by this Act shall apply with respect to taxable 
years beginning after December 31, 1996.