To amend the Internal Revenue Code of 1986 to exclude from gross income that portion of a governmental pension which does not exceed the maximum benefits payable under title II of the Social Security Act which could have been excluded from income for the taxable year.

SECTION 1. EXCLUSION FOR CERTAIN PENSIONS AND ANNUITIES UNDER PUBLIC 
              RETIREMENT SYSTEMS.

    (a) In General.--Part III of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to items specifically excluded 
from income) is amended by redesignating section 137 as section 138 and 
by inserting after section 136 the following new section:

``SEC. 137. CERTAIN PENSIONS AND ANNUITIES UNDER PUBLIC RETIREMENT 
              SYSTEMS.

    ``(a) General Rule.--In the case of an individual, gross income 
does not include any amount (otherwise includable in gross income) 
received as a qualified governmental pension.
    ``(b) Limitations.--
            ``(1) Dollar limitation.--The aggregate amount excluded 
        under subsection (a) for the taxable year shall not exceed--
                    ``(A) the maximum excludable social security 
                benefits of the taxpayer for such year, reduced by
                    ``(B) the social security benefits (within the 
                meaning of section 86(d)) received by the taxpayer 
                during such year which were excluded from gross income.
            ``(2) Individual must perform the services giving rise to 
        pension.--Subsection (a) shall not apply to any qualified 
        governmental pension received by the taxpayer during the 
        taxable year unless the taxpayer (or the spouse or former 
        spouse of the taxpayer) performed the services giving rise to 
        such pension.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Qualified governmental pension.--The term `qualified 
        governmental pension' means any pension or annuity under a 
        public retirement system to the extent such pension or annuity 
        is not attributable to service--
                    ``(A) which constitutes employment for purposes of 
                chapter 21 (relating to the Federal Insurance 
                Contributions Act), or
                    ``(B) which is covered by an agreement made 
                pursuant to section 218 of the Social Security Act.
            ``(2) Maximum excludable social security benefits.--The 
        term `maximum excludable social security benefits' means an 
        amount equal to so much of the applicable maximum benefit 
        amount for the taxpayer for the taxable year which would be 
        excluded from gross income if such benefit amount were treated 
        as social security benefits (within the meaning of section 
        86(d)) received during the taxable year.
            ``(3) Applicable maximum benefit amount.--The term 
        `applicable maximum benefit amount' means--
                    ``(A) in the case of an unmarried individual, the 
                maximum individual social security benefit,
                    ``(B) in the case of a joint return, 150 percent of 
                the maximum individual social security benefit, or
                    ``(C) in the case of a married individual filing a 
                separate return, 75 percent of the maximum individual 
                social security benefit.
        For purposes of the preceding sentence, marital status shall be 
        determined under section 7703.
            ``(4) Maximum individual social security benefit.--
                    ``(A) In general.--The term `maximum individual 
                social security benefit' means, with respect to any 
                taxable year, the maximum total amount (as certified by 
                the Secretary of Health and Human Services to the 
                Secretary) which could be paid for all months in the 
                calendar year in which such taxable year begins as old-
                age insurance benefits under section 202(a) of the 
                Social Security Act (without regard to any reduction, 
                deduction, or offset under section 202(k) or section 
                203 of such Act) to any individual who attained age 65, 
                and filed application for such benefits, on the first 
                day of such calendar year.
                    ``(B) Part years.--In the case of an individual who 
                receives a qualified governmental pension with respect 
                to a period of less than a full taxable year, the 
                maximum individual social security benefit for such 
                individual for such year shall be reduced as provided 
                in regulations prescribed by the Secretary to properly 
                correspond to such period.
            ``(5) Public retirement system.--The term `public 
        retirement system' means any pension, annuity, retirement, or 
        similar fund or system established by the United States, a 
        State, a possession of the United States, any political 
        subdivision of any of the foregoing, or the District of 
        Columbia.''
    (b) Technical Amendment.--Subparagraph (A) of section 86(b)(2) of 
such Code (defining modified adjusted gross income) is amended by 
inserting ``137,'' before ``911''.
    (c) Clerical Amendment.--The table of sections for part III of 
subchapter B of chapter 1 of such Code is amended by redesignating the 
item relating to section 137 as section 138 and by inserting after the 
item relating to section 136 the following new item:

                              ``Sec. 137. Certain pensions and 
                                        annuities under public 
                                        retirement systems.''
    (d) Effective Date.--The amendments made by this Act shall apply to 
taxable years beginning after the date of the enactment of this Act.

Summary: Amends the Internal Revenue Code to exclude from the gross income of an individual amounts received as a pension or annuity under a public retirement system to the extent they are not attributable to services covered under the social security system. Limits the tax exclusion based upon calculations relating to income tax treatment of social security benefits.