TECHNICAL EXPLANATION OF H.R. 4019

FOR CONSIDERATION BY THE HOUSE

COMMITTEE ON RULES ON JUNE 11, 2002

Prepared by

the Staff of the

JOINT COMMITTEE ON TAXATION

June 11, 2002

JCX-59-02
i

CONTENTS

Page

INTRODUCTION .......................................................................................................................... 1

A. Basic Standard Deduction Marriage Penalty Relief ........................................................... 2

B. Expansion of the 15-Percent Rate Bracket For Married Couples Filing Joint Returns...... 4

C. Marriage Penalty Relief and Simplification Relating to the Earned Income Credit........... 6
1

INTRODUCTION

This document,1 prepared by the staff of the Joint Committee on Taxation, provides a 

technical explanation of H.R. 4019.

 

1

 This document may be cited as follows: Joint Committee on Taxation, Technical 

Explanation of H.R. 4019 for Consideration by the House Committee on Rules on June 11, 2002, 

(JCX-59-02), June 11, 2002.
2

A. Basic Standard Deduction Marriage Penalty Relief

Present Law

Marriage penalty

A married couple generally is treated as one tax unit that must pay tax on the couple's 

total taxable income. Although married couples may elect to file separate returns, the rate 

schedules and other provisions are structured so that filing separate returns usually results in a 

higher tax than filing a joint return. Other rate schedules apply to single persons and to single 

heads of households.

A “marriage penalty” exists when the combined tax liability of a married couple filing a 

joint return is greater than the sum of the tax liabilities of each individual computed as if they 

were not married. A "marriage bonus" exists when the combined tax liability of a married 

couple filing a joint return is less than the sum of the tax liabilities of each individual computed 

as if they were not married.

Basic standard deduction

Taxpayers who do not itemize deductions may choose the basic standard deduction (and 

additional standard deductions, if applicable),2 which is subtracted from adjusted gross income 

(“AGI”) in arriving at taxable income. The size of the basic standard deduction varies according 

to filing status and is adjusted annually for inflation. For 2002, the basic standard deduction 

amount for single filers is 60 percent of the basic standard deduction amount for married couples 

filing joint returns. Thus, two unmarried individuals have standard deductions whose sum 

exceeds the standard deduction for a married couple filing a joint return.

Present law provides that the basic standard deduction for a married couple filing a joint 

return will be increased to twice the basic standard deduction for an unmarried individual filing a 

single return. As provided in the Economic Growth and Tax Relief Reconciliation Act of 2001 

(“EGTRRA”), this increase in the basic standard deduction is phased in over five years 

beginning in 2005 and will be fully phased in for 2009 and thereafter. Table 1, below, shows the 

standard deduction for married couples filing a joint return as a percentage of the standard 

deduction for single individuals.

 

2

 Additional standard deductions are allowed with respect to any individual who is 

elderly (age 65 or over) or blind.
3

Table 1.–Phase-In of the Increase of the Basic Standard Deduction

for Married Couples Filing Joint Returns

Taxable years beginning in

calendar year

Standard deduction for joint 

returns as percentage of standard

deduction for single returns

2002 - 2004 167%

2005 174%

2006 184%

2007 187%

2008 190%

2009 and later 200%

Sunset provision

EGTRRA made a number of changes to the Federal tax laws, including the increase of 

the basic standard deduction for married couples filing a joint return. However, in order to 

comply with reconciliation procedures under the Congressional Budget Act of 1974 (e.g., section 

313 of the Budget Act, under which a point of order may be lodged in the Senate), EGTRRA 

included a “sunset” provision, pursuant to which the provisions of EGTRRA expire at the end of 

2010. Specifically, EGTRRA’s provisions do not apply for taxable, plan, or limitation years 

beginning after December 31, 2010, or to estates of decedents dying after, or gifts or generationskipping transfers made after, December 31, 2010. EGTRRA provides that, as of the effective 

date of the sunset, both the Code and the Employee Retirement Income Security Act of 1974 

(“ERISA”) will be applied as though EGTRRA had never been enacted. Likewise, all other 

provisions of the Code and ERISA will be applied as though the relevant provisions of EGTRRA 

had never been enacted.

Explanation of Provision

The bill repeals the sunset provision of EGTRRA for purposes of the increase in the basic 

standard deduction for married couples filing a joint return. Thus, under the bill, the increase in 

the basic standard deduction would remain in effect after December 31, 2010.

Effective Date

The provision is effective on the date of enactment.
4

B. Expansion of the 15-Percent Rate Bracket For

Married Couples Filing Joint Returns

Present Law

In general

Under the Federal individual income tax system, an individual who is a citizen or resident 

of the United States generally is subject to tax on worldwide taxable income. Taxable income is 

total gross income less certain exclusions, exemptions, and deductions. An individual may claim 

either a standard deduction or itemized deductions. 

An individual’s income tax liability is determined by computing his or her regular 

income tax liability and, if applicable, alternative minimum tax liability. 

Regular income tax liability

Regular income tax liability is determined by applying the regular income tax rate 

schedules (or tax tables) to the individual’s taxable income and then is reduced by any applicable 

tax credits. The regular income tax rate schedules are divided into several ranges of income, 

known as income brackets, and the marginal tax rate increases as the individual’s income 

increases. The income bracket amounts are adjusted annually for inflation. Separate rate 

schedules apply based on filing status: single individuals (other than heads of households and 

surviving spouses), heads of households, married individuals filing joint returns (including 

surviving spouses), married individuals filing separate returns, and estates and trusts. Lower 

rates may apply to capital gains.

In general, the bracket breakpoints for single individuals are approximately 60 percent of 

the rate bracket breakpoints for married couples filing joint returns.3 The rate bracket 

breakpoints for married individuals filing separate returns are exactly one-half of the rate 

brackets for married individuals filing joint returns. A separate, compressed rate schedule 

applies to estates and trusts. 

15-percent rate bracket marriage penalty relief

The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) 

increased the size of the 15-percent regular income tax rate bracket for a married couple filing a 

joint return to twice the size of the corresponding rate bracket for an unmarried individual filing 

a single return. The increase is phased in over four years, beginning in 2005. Therefore, this 

provision is fully effective (i.e., the size of the 15-percent regular income tax rate bracket for a 

married couple filing a joint return would be twice the size of the 15-percent regular income tax 

rate bracket for an unmarried individual filing a single return) for taxable years beginning after 

 

3

 The rate bracket breakpoint for the 39.6 percent marginal tax rate is the same for single 

individuals and married couples filing joint returns.
5

December 31, 2007. Table 2, below, shows the increase in the size of the 15-percent bracket 

during the phase-in period.

Table 2.–Increase in Size of 15-Percent Rate Bracket

for Married Couples Filing a Joint Return

Taxable year

End point of 15-percent rate bracket for

married couple filing joint return as

percentage of end point of 15-percent

rate bracket for unmarried individuals

2005 180%

2006 187%

2007 193%

2008 and thereafter 200%

This provision of EGTRRA is effective for taxable years beginning after December 31, 

2004.

Sunset provision

EGTRRA made a number of changes to the Federal tax laws, including the expansion of 

the 15-percent rate bracket for married couples filing a joint return. However, in order to comply 

with reconciliation procedures under the Congressional Budget Act of 1974 (e.g., section 313 of 

the Budget Act, under which a point of order may be lodged in the Senate), EGTRRA included a 

“sunset” provision, pursuant to which the provisions of EGTRRA expire at the end of 2010. 

Specifically, EGTRRA’s provisions do not apply for taxable, plan, or limitation years beginning 

after December 31, 2010, or to estates of decedents dying after, or gifts or generation-skipping 

transfers made after, December 31, 2010. EGTRRA provides that, as of the effective date of the 

sunset, both the Code and the Employee Retirement Income Security Act of 1974 (“ERISA”) 

will be applied as though EGTRRA had never been enacted. Likewise, all other provisions of 

the Code and ERISA will be applied as though the relevant provisions of EGTRRA had never 

been enacted.

Explanation of Provision

The bill repeals the sunset provision of EGTRRA for purposes of the expansion of the 

15-percent rate bracket for married couples filing a joint return. Thus, under the bill, the 

expansion of the 15-percent rate bracket would remain in effect for taxable years beginning after 

December 31, 2010.

Effective Date

The provision is effective on the date of enactment.
6

C. Marriage Penalty Relief and Simplification Relating to the Earned Income Credit

Prior and Present Law

In general

Eligible low-income workers are able to claim a refundable earned income credit. The 

amount of the credit an eligible taxpayer may claim depends upon the taxpayer’s income, filing 

status, and whether the taxpayer has one, more than one, or no qualifying children. 

The earned income credit is not available to married individuals who file separate returns. 

No earned income credit is allowed if the taxpayer has disqualified income in excess of $2,550 

(for 2002) for the taxable year.4 In addition, no earned income credit is allowed if an eligible 

individual is the qualifying child of another taxpayer.5

Definition of qualifying child and tie-breaker rules

To claim the earned income credit, a taxpayer must either (1) have a qualifying child or 

(2) meet the requirements for childless adults. A qualifying child must meet a relationship test, 

an age test, and a residence test. First, the qualifying child must be the taxpayer’s child, 

stepchild, adopted child, grandchild, or foster child. Second, the child must be under age 19 (or 

under age 24 if a full-time student) or permanently and totally disabled regardless of age. Third, 

the child must live with the taxpayer in the United States for more than half the year (a full year 

for foster children).

Relationship test

Prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), 

an individual satisfied the relationship test under the earned income credit if the individual was 

the taxpayer’s: (1) son or daughter or a descendant of either;6 (2) stepson or stepdaughter; or (3) 

eligible foster child. An eligible foster child was an individual (1) who was a brother, sister, 

stepbrother, or stepsister of the taxpayer (or a descendant of any such relative), or who is placed 

with the taxpayer by an authorized placement agency, and (2) whom the taxpayer cares for as her 

or his own child. Under EGTRRA, the relationship test for the earned income credit is met if the 

individual is the taxpayer’s son, daughter, stepson, stepdaughter, or a descendant of any such 

 

4

 Sec. 32(i). Disqualified income is the sum of: (1) interest and dividends includible in 

gross income for the taxable year; (2) tax-exempt income received or accrued in the taxable year; 

(3) net income from rents and royalties for the taxable year not derived in the ordinary course of 

business; (4) capital gain net income for the taxpayer year; and (5) net passive income for the 

taxable year. Sec. 32(i)(2).

5

 Repealed subsection 32(c)(1)(B).

6

 A child who is legally adopted or placed with the taxpayer for adoption by an 

authorized adoption agency is treated as the taxpayer’s own child. Sec. 32(c)(3)(B)(iv).
7

individuals.7 A brother, sister, stepbrother, stepsister, or a descendant of such individuals, also 

qualifies if the taxpayer cares for such individual as his or her own child. A foster child satisfies 

the relationship test as well. A foster child is defined as an individual who is placed with the 

taxpayer by an authorized placement agency and whom the taxpayer cares for as his or her own 

child. In order to be a qualifying child, in all cases the child must have the same principal place 

of abode as the taxpayer for over one-half of the taxable year.

Prior to EGTRRA, if a child otherwise qualified with respect to more than one person, 

the child was treated as a qualifying child only of the person with the highest modified adjusted 

gross income (the, “tie-breaking rule”).

EGTRRA changed the prior-law tie-breaking rule. Under EGTRRA, if an individual 

would be a qualifying child with respect to more than one taxpayer, and more than one taxpayer 

claims the earned income credit with respect to that child, then the following tie-breaking rules 

apply. First, if one of the individuals claiming the child is the child’s parent (or parents who file 

a joint return), then the child is considered the qualifying child of the parent (or parents). 

Second, if both parents claim the child and the parents do not file a joint return together, then the 

child is considered a qualifying child first of the parent with whom the child resided for the 

longest period of time during the year, and second of the parent with the highest adjusted gross 

income. Finally, if none of the taxpayers claiming the child as a qualifying child is the child’s 

parent, the child is considered a qualifying child with respect to the taxpayer with the highest 

adjusted gross income.

Prior to EGTRRA, “modified adjusted gross income” was defined as adjusted gross 

income determined without regard to certain losses and increased by certain amounts not 

includible in gross income.8 The losses disregarded were: (1) net capital losses (up to $3,000); 

(2) net losses from estates and trusts; (3) net losses from nonbusiness rents and royalties; (4) 75 

percent of the net losses from businesses, computed separately with respect to sole 

proprietorships (other than farming), farming sole proprietorships, and other businesses. The 

amounts added to adjusted gross income to arrive at modified adjusted gross income included: 

(1) tax-exempt interest; and (2) nontaxable distributions from pensions, annuities, and individual 

retirement plans (but not nontaxable rollover distributions or trustee-to-trustee transfers).

EGTRRA simplified the calculation of the earned income credit by replacing modified 

adjusted gross income with adjusted gross income.

Definition of earned income

To claim the earned income credit, the taxpayer must have earned income. Prior to 

EGTRRA, earned income consisted of wages, salaries, other employee compensation, and net 

earnings from self employment.9 Employee compensation includes anything of value received 

 

7

 As under prior law, an adopted child is treated as a child of the taxpayer by blood.

8

 Sec. 32(c)(5).

9

 Sec. 32(c)(2)(A).
8

by the taxpayer from the employer in return for services of the employee, including nontaxable 

earned income. Nontaxable forms of compensation treated as earned income include the 

following: (1) elective deferrals under a cash or deferred arrangement or section 403(b) annuity 

(sec. 402(g)); (2) employer contributions for nontaxable fringe benefits, including contributions 

for accident and health insurance (sec. 106), dependent care (sec. 129), adoption assistance (sec. 

137), educational assistance (sec. 127), and miscellaneous fringe benefits (sec. 132); (3) salary 

reduction contributions under a cafeteria plan (sec. 125); (4) meals and lodging provided for the 

convenience of the employer (sec. 119), and (5) housing allowance or rental value of a parsonage 

for the clergy (sec. 107). Under EGTRRA, earned income includes wages, salaries, tips, and 

other employee compensation, if includible in gross income for the taxable year, plus net 

earnings from self employment. EGTRRA simplified the definition of earned income by 

excluding nontaxable employee compensation from the definition of earned income for earned 

income credit purposes.

Calculation of the credit

The maximum earned income credit is phased in as an individual’s earned income 

increases. The credit phases out for individuals with earned income (or if greater, adjusted gross 

income) over certain levels. In the case of a married individual who files a joint return, the 

earned income credit both for the phase-in and phase-out is calculated based on the couples’ 

combined income.

The credit is determined by multiplying the credit rate by the taxpayer's earned income 

up to a specified earned income amount. The maximum amount of the credit is the product of 

the credit rate and the earned income amount. The maximum credit amount applies to taxpayers 

with (1) earnings at or above the earned income amount and (2) adjusted gross income (or 

earnings, if greater) at or below the phase-out threshold level.

For taxpayers with adjusted gross income (or earned income, if greater) in excess of the 

phase-out threshold, the credit amount is reduced by the phase-out rate multiplied by the amount 

of earned income (or adjusted gross income, if greater) in excess of the phase-out threshold. In 

other words, the credit amount is reduced, falling to $0 at the “breakeven” income level, the 

point where a specified percentage of “excess” income above the phase-out threshold offsets 

exactly the maximum amount of the credit. The earned income amount and the phase-out 

threshold are adjusted annually for inflation. Table 3, below, shows the earned income credit 

parameters for taxable year 2002.10

For married taxpayers who file a joint return, EGTRRA increased the beginning and 

ending points of the earned income credit phase-out by $3,000. The increase is phased in as 

follows: by $1,000 in the case of taxable years beginning in 2002, 2003, and 2004; by $2,000 in 

the case of taxable years beginning in 2005, 2006, and 2007; and by $3,000 in the case of taxable 

years beginning after 2007. The $3,000 amount is to be adjusted annually for inflation after 

2008.

 

10 The table is based on Rev. Proc. 2001-59.
9

Table 3.–Earned Income Credit Parameters (2002)

Two or more 

qualifying 

children

One

qualifying

child

No

qualifying 

children

Credit rate (percent)....................................

Earned income amount................................

Maximum credit.........................................

40.00%

$10,350

$4,140

34.00%

$7,370

$2,506

7.65%

$4,910

$364

Phase-out begins.........................................

Phase-out begins (married filing jointly).......

$13,520

$14,520

$13,520

$14,520

$6,150

$7,150

Phase-out rate (percent)............................... 21.06% 15.98% 7.65%

Phase-out ends ...........................................

Phase-out ends (married filing jointly) .........

$33,178

$34,178

$29,201

$30,201

$11,060

$12,060

Under prior law, an individual’s alternative minimum tax liability reduced the amount of 

the refundable earned income credit.11 This provision was repealed by EGTRRA.

EGTRRA authorized the IRS, beginning in 2004, to use math error authority to deny the 

earned income credit if the Federal Case Registry of Child Support Orders indicates that the 

taxpayer is the noncustodial parent of the child with respect to whom the credit is claimed. 

Sunset provision

EGTRRA made a number of changes to the Federal tax laws, including the expansion of 

the earned income credit. However, in order to comply with reconciliation procedures under the 

Congressional Budget Act of 1974 (e.g., section 313 of the Budget Act, under which a point of 

order may be lodged in the Senate), EGTRRA included a “sunset” provision, pursuant to which 

the provisions of EGTRRA expire at the end of 2010. Specifically, EGTRRA’s provisions do 

not apply for taxable, plan, or limitation years beginning after December 31, 2010, or to estates 

of decedents dying after, or gifts or generation-skipping transfers made after, December 31, 

2010. EGTRRA provides that, as of the effective date of the sunset, both the Code and the 

Employee Retirement Income Security Act of 1974 (“ERISA”) will be applied as though 

EGTRRA had never been enacted. Likewise, all other provisions of the Code and ERISA will be 

applied as though the relevant provisions of EGTRRA had never been enacted.

Explanation of Provision

The bill repeals the sunset provision of EGTRRA for purposes of the expansion and 

simplification of the earned income credit. Thus, under the bill, the expansion and simplification 

 

11 Sec. 32(h).
10

of the earned income credit would remain in effect for taxable years beginning after December 

31, 2010.

Effective Date

The provision is effective on the date of enactment.