In order to claim the credit, an individual must either have a qualifying child or meet
other requirements. A qualifying child must meet a relationship test, an age test, an
identification test, and a residence test. In order to claim the credit without a qualifying child, an
individual must not be a dependent and must be over age 24 and under age 65

. To satisfy the identification test, individuals must include on their tax return the name
and age of each qualifying child. For returns filed with respect to tax year 1996, individuals
must provide a taxpayer identification number (TIN) for all qualifying children born on or before
November 30, 1996. For returns filed with respect to tax year 1997 and all subsequent years.
individuals must provide TINs for all qualifying children, regardless of their age. An
individual’s TIN is generally that individual’s social security number.

Mathematical or clerical errors

The IRS may summarily assess additional tax due as a result of a mathematical or clerical
error without sending the taxpayer a notice of deficiency and giving the taxpayer an opportunity
to petition the Tax Court. Where the IRS uses the summary assessment procedure for
mathematical or clerical errors, the taxpayer must be given an explanation of the asserted error
and a period of 60 days to request that the IRS abate its assessment. The IRS may not proceed to
collect the amount of the assessment until the taxpayer has agreed to it or has allowed the 60-day
period for objecting to expire. If the taxpayer files a request for abatement of the assessment
specified in the notice, the IRS must abate the assessment. Any reassessment of the abated
amount is subject to the ordinary deficiency procedures. The request for abatement of the
assessment is the only procedure a taxpayer may use prior to paying the assessed amount in
order to contest an assessment arising out of a mathematical or clerical error. Once the
assessment is satisfied, however, the taxpayer may file a claim for refund if he or she believes
the assessment was made in error.

Description of Proposal

Individuals would not be eligible for the credit if they do not include their taxpayer
identification number (and, if married, their spouse’s taxpayer identification number) on their tax
return. Solely for these purposes and for purposes of the present-law identification test for a
qualifying child, a taxpayer identification number would be defined as a social security number
issued to an individual by the Social Security Administration other than a number issued under
section 205(c)(2)(B)(i)(I1) (or that portion of sec. 205(c)(2)(B)(i)(III) relating to it) of the Social
Security Act (regarding the issuance of a number to an individual applying for or receiving
Federally funded benefits).

If an individual fails to provide a correct taxpayer identification number, such omission
would be treated as a mathematical or clerical error. If an individual who claims the credit with
respect to net earnings from self-employment fails to pay the proper amount of self-employment
tax on such net earnings, the failure would be treated as a mathematical or clerical error for
purposes of the amount of credit allowed.

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Two or more

One

Phaseout limit _.

E ive D

$28.568

qualifying qualifying
children child
Credit rate (percent) ................. 40.00 34.00
Earned income threshold ........... Lote teens $9,120 $6,500
Maximum credit ....0 00022. $3,648 $2,210
First-tier phaseout threshold ..................... $11,910 $11,910
First-tier phaseout rate (percent) ...... bees nee ee 21.06 15.98
Second-tier phaseout threshold .................... $21,360 $17,340
Second-tier phaseout rate (percent) ................. 23.00 18.00

$24.797

The proposal would be effective for taxable years beginning after December 31, 1996.

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EARNED INCOME CREDIT PROVISIONS
1. Deny credit to individuals not authorized to be employed in the United States
Present Law

In general

Certain eligible low-income workers are entitled to claim a refundable credit on their
income tax return. The amount of the credit an eligible individual may claim depends upon
whether the individual has one, more than one, or no qualifying children and is determined by
multiplying the credit rate by the taxpayer’s earned income up to an earned income amount. The
maximum amount of the credit is the product of the credit rate and the earned income amount.
For taxpayers with earned income (or adjusted gross income (AGI), if greater) in excess of the
beginning of the phaseout range, the maximum credit amount is reduced by the phaseout rate
multiplied by the amount of earned income (or AGI, if greater) in excess of the beginning of the
phaseout range. For taxpayers with earned income (or AGI, if greater) in excess of the end of
the phaseout range, no credit is allowed.

The parameters for the credit depend upon the number of qualifying children the
individual claims. For 1996, the parameters are given in the following table:

Two or more One qualifying No qualifying
qualifying child-- children--
children--

Credit rate 40.00% 34.00% 7.65%
Eamed income amount $8,890 $6,330 $4,220
Maximum credit $3,556 $2,152 $323
Phaseout begins $11,610 $11,610 $5,280
Phaseout rate 21.06% 15.98% 7.65%
Phaseout ends $28,495 $25,078 $9,500

For years after 1996, the credit rates and the phaseout rates will be the same as in the
preceding table. The earned income amount and the beginning of the phaseout range are indexed
for inflation; because the end of the phaseout range depends on those amounts as well as the
phaseout rate and the credit rate, the end of the phaseout range will also increase if there is
inflation.

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Effective Date
The proposal would be effective for taxable years beginning after December 31, 1995. a
2. Change test for disqualified income

Presen

For taxable years beginning after December 31, 1995, an individual is not eligible for the
credit if the aggregate amount of “disqualified income” of the taxpayer for the taxable year
exceeds $2,350. This threshold is not indexed. Disqualified income is the sum of.

(1) interest (taxable and tax-exempt),
(2) dividends, and
(3) net rent and royalty income (if greater than zero).

Description of Proposal
For purposes of the disqualified income test, the following items would be added to the

definition of disqualified income: capital gain net income and net passive income (if greater than
zero) that is not self-employment income.

The threshold above which an individual would not be eligible for the credit would be
reduced from $2,350 to $2,250, and the threshold would be indexed for inflation after 1997.

Effective Date
The proposal would be effective for taxable years beginning after December 31, 1996.

3. Modify definition of adjusted gross income used for phasing out the credit

Present Law

For taxpayers with earned income (or AGI, if greater) in excess of the beginning of the
phaseout range, the maximum credit amount is reduced by the phaseout rate multiplied by the
amount of earned income (or AGI, if greater) in excess of the beginning of the phaseout range.
For taxpayers with earned income (or AGI, if greater) in excess of the end of the phaseout range,
no credit is allowed.

Description of Proposal

The proposal would modify the definition of AGI used for phasing out the credit by
disregarding certain losses. The losses disregarded would be:



DESCRIPTION OF EARNED INCOME CREDIT
PROVISIONS CONTAINED IN AN
AMENDMENT IN THE NATURE OF A SUBSTITUTE
TO BE OFFERED BY CHAIRMAN ARCHER

Scheduled for Markup
by the
HOUSE COMMITTEE ON WAYS AND MEANS
on

June 12, 1996

Prepared by the Staff
of the

JOINT COMMITTEE ON TAXATION

June 11, 1996

JCX-28-96



(1) net capital losses (if greater than zero),

(2) net losses from trusts and estates,

(3) net losses from nonbusiness rents and royalties, and

(4) 50 percent of the net loss from businesses, computed separately with respect
to sole proprietorships (other than in farming), sole proprietorships in
farming, and other businesses.

For purposes of item (4), above, amounts attributable to a business that consists of the
performance of services by the taxpayer as an employee would not be taken into account.

Effectiv
The proposal would be effective for taxable years beginning after December 31, 1996.

4. Second-tier phaseout of the credit

Present Law

Under present law, for taxpayers with earned income (or AGI, if greater) in excess of the
beginning of the phaseout range, the maximum credit amount is reduced by the phaseout rate
multiplied by the amount of earned income (or AGI. if greater) in excess of the beginning of the
phaseout range. For taxpayers with earned income (or AGI, if greater) in excess of the end of
the phaseout range, no credit is allowed.

Descripti roposal

The proposal would increase the phaseout rate of the credit for individuals with earned
income (or modified AGI, if greater) in excess of a second-tier phaseout threshold. This second-
tier phaseout would not apply to individuals with no qualifying children. For individuals with
two or more qualifying children, the second-tier phaseout threshold would be $21,360 and the
phaseout rate for income in excess of that threshold would be 23.00 percent. For individuals
with one qualifying child, the second-tier phaseout threshold would be $17,340 and the phaseout
rate for income in excess of that threshold would be 18.00 percent. These second-tier phaseout
thresholds would be indexed for inflation after 1997. The phaseout rate applied to income
between the present-law phaseout threshold and the new, second-tier phaseout threshold would
be the same as would apply under present law for 1997 and future years. With these changes,
the parameters of the credit for 1997 for individuals with one qualifying child and for individuals
with two or more qualifying children will be as follows:



CONTENTS

INTRODUCTION .....0.0 0.0.0. ee
EARNED INCOME CREDIT PROVISIONS ................0.0¢22505-
1. Deny credit to individuals not authorized to be employed in the United States
2. Change test for disqualified income .....................

3. Modify definition of adjusted gross income used for phasing out the credit

a +b f nw to _

4. Second-tier phaseout of the credit ...................00..005.

@


INTRODUCTION

This document,’ prepared by the staff of the Joint Committee on Taxation, contains a
description of proposed modifications to the earned income credit to be considered by the House
Committee on Ways and Means on June 12, 1996. The Committee has scheduled a markup of
welfare reform for June 12, 1996, and these provisions are contained in an amendment in the
nature of a substitute to be offered by Chairman Archer.

1 This document may be cited as follows: Joint Committee on Taxation, Description of
Earned Income Credit Provisions Contained in an Amendment in the Nature of a Substitute to be
Offered by Chairman Archer (JCX-28-96), June 11, 1996.

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