I

104TH CONGRESS

2D SESSION H. R. 3943

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.

IN THE HOUSE OF REPRESENTATIVES

AUGUST 1, 1996

Mr. PETRI introduced the following bill; which was referred to the Committee

on Ways and Means

A BILL

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.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. EARNED INCOME CREDIT FOR INDIVIDUALS

4 WITH CHILDREN.

5 (a) CREDIT DETERMINED WITHOUT REGARD TO

6 NUMBER OF CHILDREN.—Subsections (b) (1) and (2) of
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1 section 32 of the Internal Revenue Code of 1986 are

2 amended to read as follows:

3 ‘‘(1) PERCENTAGES.—The credit percentage

4 and the phaseout percentage shall be determined as

5 follows:

‘‘In the case of: The credit percentage is:

The phaseout percentage is:

An individual not filing a

joint return ...................... 15 11

Married individuals filing

joint return ...................... 18.5 10

6 ‘‘(2) AMOUNTS.—The earned income amount

7 and the phaseout amount shall be determined as fol8 lows:

‘‘In the case of: The earned income

amount is:

The phaseout

amount is:

An individual not filing a

joint return ...................... $11,000 $11,600

Married individuals filing

joint return ...................... $9,000 $12,000.’’

9 (b) DEFINITION OF ELIGIBLE INDIVIDUAL.—Sub10 section (c)(1)(A) of section 32 of such Code (defining eligi11 ble individual) is amended to read as follows:

12 ‘‘(A) IN GENERAL.—The term ‘eligible in13 dividual’ means any individual who has a quali14 fying child for the taxable year.’’

15 (c) MODIFICATION OF ADJUSTED GROSS INCOME

16 DEFINITION.—
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1 (1) IN GENERAL.—Subsections (a)(2),

2 (c)(1)(C), and (f)(2)(B) of section 32 of such Code

3 are each amended by striking ‘‘adjusted gross in4 come’’ and inserting ‘‘modified adjusted gross in5 come’’.

6 (2) MODIFIED ADJUSTED GROSS INCOME DE7 FINED.—Subsection (c) of section 32 of such Code

8 (relating to definitions and special rules) is amended

9 by adding at the end the following new paragraph:

10 ‘‘(5) MODIFIED ADJUSTED GROSS INCOME.—

11 ‘‘(A) IN GENERAL.—The term ‘modified

12 adjusted gross income’ means adjusted gross in13 come—

14 ‘‘(i) increased by the sum of the

15 amounts described in subparagraph (B),

16 and

17 ‘‘(ii) determined without regard to—

18 ‘‘(I) the amounts described in

19 subparagraph (C), or

20 ‘‘(II) the deduction allowed under

21 section 172.

22 ‘‘(B) NONTAXABLE INCOME TAKEN INTO

23 ACCOUNT.—Amounts described in this subpara24 graph are—
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1 ‘‘(i) Social Security benefits (as de2 fined in section 86(d)) received by the tax3 payer during the taxable year to the extent

4 not included in gross income,

5 ‘‘(ii) amounts which—

6 ‘‘(I) are received during the tax7 able year by (or on behalf of) a spouse

8 pursuant to a divorce or separation

9 instrument (as defined in section

10 71(b)(2)), and

11 ‘‘(II) under the terms of the in12 strument are fixed as payable for the

13 support of the children of the payor

14 spouse (as determined under section

15 71(c)),

16 but only to the extent such amounts exceed

17 $6,000,

18 ‘‘(iii) interest received or accrued dur19 ing the taxable year which is exempt from

20 tax imposed by this chapter, and

21 ‘‘(iv) amounts received as a pension or

22 annuity, and any distributions or payments

23 received from an individual retirement

24 plan, by the taxpayer during the taxable
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1 year to the extent not included in gross in2 come.

3 Clause (iv) shall not include any amount which

4 is not includible in gross income by reason of

5 section 402(c), 403(a)(4), 403(b)(8), 408(d)

6 (3), (4), or (5), or 457(e)(10).

7 ‘‘(C) CERTAIN AMOUNTS DISREGARDED.—

8 An amount is described in this subparagraph if

9 it is—

10 ‘‘(i) the amount of losses from sales

11 or exchanges of capital assets in excess of

12 gains from such sales or exchanges to the

13 extent such amount does not exceed the

14 amount under section 1211(b)(1),

15 ‘‘(ii) the net loss from the carrying on

16 of trades or businesses, computed sepa17 rately with respect to—

18 ‘‘(I) trades or businesses (other

19 than farming) conducted as sole pro20 prietorships,

21 ‘‘(II) trades or businesses of

22 farming conducted as sole proprietor23 ships, and

24 ‘‘(III) other trades or business,
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1 ‘‘(iii) the net loss from estates and

2 trusts, and

3 ‘‘(iv) the excess (if any) of amounts

4 described in subsection (i)(2)(C)(ii) over

5 the amounts described in subsection

6 (i)(2)(C)(i) (relating to nonbusiness rents

7 and royalties).

8 For purposes of clause (ii), there shall not be

9 taken into account items which are attributable

10 to a trade or business which consists of the per11 formance of services by the taxpayer as an em12 ployee.’’

13 (d) INFLATION ADJUSTMENTS.—

14 (1) ADJUSTMENT OF PHASEOUT AMOUNTS.—

15 Paragraph (1) of subsection (i) of section 32 of such

16 Code (relating to inflation adjustments) is amended

17 to read as follows:

18 ‘‘(1) PHASEOUT AMOUNTS.—In the case of any

19 taxable year beginning after 1997—

20 ‘‘(A) INDIVIDUAL NOT FILING JOINT RE21 TURN.—Each dollar amount contained in sub22 section (b)(2) relating to the phaseout amount

23 for an individual not filing a joint return shall

24 be increased by an amount equal to—

25 ‘‘(i) such dollar amount, multiplied by
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1 ‘‘(ii) the cost-of-living adjustment de2 termined under section 1(f)(3) less 2 per3 centage points (but not less than zero), for

4 the calendar year in which the taxable year

5 begins, by substituting ‘calendar year

6 1997’ for ‘calendar year 1992’.

7 ‘‘(B) JOINT RETURNS.—Each dollar

8 amount contained in subsection (b)(2) relating

9 to the phaseout amount for married individuals

10 filing a joint return shall be increased by an

11 amount equal to—

12 ‘‘(i) such dollar amount, multiplied by

13 ‘‘(ii) the cost-of-living adjustment de14 termined under section 1(f)(3) plus 1 per15 centage point, for the calendar year in

16 which the taxable year begins, by sub17 stituting ‘calendar year 1996’ for ‘calendar

18 year 1992’.’’

19 (2) ADJUSTMENT OF CREDIT PERCENTAGES.—

20 Subsection (i) of section 32 of such Code (relating

21 to inflation adjustments) is amended by adding at

22 the end the following:

23 ‘‘(3) CREDIT PERCENTAGES.—In the case of

24 any taxable year beginning after 1997—
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1 ‘‘(A) INDIVIDUAL NOT FILING JOINT RE2 TURN.—The credit percentage contained in sub3 section (b)(1) for an individual not filing a joint

4 return shall be increased by an amount equal

5 to—

6 ‘‘(i) such credit percentage, multiplied

7 by

8 ‘‘(ii) the cost-of-living adjustment de9 termined under section 1(f)(3) less 2 per10 centage points (but not less than zero), for

11 the calendar year in which the taxable year

12 begins, by substituting ‘calendar year

13 1997’ for ‘calendar year 1992’.

14 ‘‘(B) JOINT RETURNS.—The credit per15 centage contained in subsection (b)(1) for mar16 ried individuals filing a joint return shall be in17 creased by an amount equal to—

18 ‘‘(i) such credit percentage, multiplied

19 by

20 ‘‘(ii) the cost-of-living adjustment de21 termined under section 1(f)(3) plus 1 per22 centage point, for the calendar year in

23 which the taxable year begins, by sub24 stituting ‘calendar year 1996’ for ‘calendar

25 year 1992’.
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1 ‘‘(C) ROUNDING RULE.—The percentages

2 determined under subparagraphs (A) and (B)

3 shall be rounded to the nearest 1/100th of 1

4 percent.’’

5 SEC. 2. ELIMINATION OF PERSONAL EXEMPTION FOR DE6 PENDENTS UNDER 18.

7 (a) IN GENERAL.—Subsection (c) of section 151 of

8 the Internal Revenue Code of 1986 is amended by adding

9 at the end the following:

10 ‘‘(6) DISALLOWANCE FOR DEPENDENT UNDER

11 18.—

12 ‘‘(A) IN GENERAL.—An exemption shall be

13 allowed under this section for a dependent only

14 if the dependent has attained the age of 18 as

15 of the close of the calendar year in which the

16 taxable year of the taxpayer begins.

17 ‘‘(B) COORDINATION WITH OTHER PROVI18 SIONS.—Except as provided in this section,

19 whenever in this title a provision refers to de20 pendents with respect to whom a deduction is

21 provided under this section, such provision shall

22 be applied without regard to subparagraph

23 (A).’’

24 (b) CONFORMING AMENDMENT.—Clause (i) of sec25 tion 151(c)(1)(B) of such Code is amended by striking
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1 ‘‘has not attained’’ and inserting ‘‘has attained the age

2 of 18 but not’’.

3 SEC. 3. CREDIT FOR CHILDREN UNDER 18.

4 (a) IN GENERAL.—Subpart C of part IV of sub5 chapter A of chapter 1 of the Internal Revenue Code of

6 1986 (relating to refundable credits) is amended by insert7 ing after section 35 the following new section:

8 ‘‘SEC. 35A. CHILDREN UNDER 18.

9 ‘‘(a) ALLOWANCE OF CREDIT.—

10 ‘‘(1) GENERAL RULE.—There shall be allowed

11 to a taxpayer as a credit against the tax imposed by

12 this subtitle for the taxable year an amount equal to

13 the sum of the child credit amounts for each qualify14 ing child.

15 ‘‘(2) CHILD CREDIT AMOUNT.—The child credit

16 amount for a qualifying child is the amount equal to

17 the credit percentage of so much of the taxpayer’s

18 earned income as does not exceed the earned income

19 amount with respect to such child.

20 ‘‘(3) LIMITATION.—The child credit amount al21 lowable to a taxpayer under paragraph (1) for a

22 qualifying child for any taxable year shall not exceed

23 the excess (if any) of—
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1 ‘‘(A) the credit percentage of the earned

2 income amount with respect to such qualifying

3 child, over

4 ‘‘(B) the sum of the initial phasedown

5 amount and the final phasedown amount.

6 ‘‘(b) PERCENTAGES AND AMOUNTS.—For the pur7 poses of subsection (a)—

8 ‘‘(1) CREDIT PERCENTAGE AND EARNED IN9 COME AMOUNT.—The credit percentage and the

10 earned income amount shall be determined as

11 follows:

‘‘In the case of: The credit percentage is:

Earned income

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

12 ‘‘(2) INITIAL PHASEDOWN AMOUNT.—The ini13 tial phasedown amount is the lesser of—

14 ‘‘(A) 5 percent of so much of the modified

15 adjusted gross income (or, if greater, the

16 earned income) of the taxpayer for the taxable

17 year as exceeds $75,000 for an individual not

18 filing a joint return ($110,000 for joint filers),

19 and

20 ‘‘(B) $210.

21 ‘‘(3) FINAL PHASEDOWN AMOUNT.—
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1 ‘‘(A) IN GENERAL.—The final phasedown

2 amount is the amount which is 2 percentage

3 points for each $2,500 (or fraction thereof) by

4 which the taxpayer’s adjusted gross income for

5 the taxable year exceeds the threshold amount

6 for the taxable year. In the case of a married

7 individual filing a separate return, the preced8 ing sentence shall be applied by substituting

9 ‘$1,250’ for ‘$2,500’. In no event shall the ap10 plicable percentage exceed 100 percent.

11 ‘‘(B) THRESHOLD AMOUNT.—For purposes

12 of subparagraph (A), the term ‘threshold

13 amount’ means the amount determined under

14 section 151(d)(3)(C).

15 ‘‘(c) DEFINITIONS.—For the purposes of this sec16 tion—

17 ‘‘(1) EARNED INCOME.—The term ‘earned in18 come’ has the meaning given such term by section

19 32(c)(2).

20 ‘‘(2) QUALIFYING CHILD.—The term ‘qualifying

21 child’ has the meaning given such term by section

22 32(c)(3), except that such term only includes an in23 dividual who has not attained the age of 18 at the

24 close of the calendar year in which the taxable year

25 of the taxpayer begins.’’
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1 (b) CLERICAL AMENDMENT.—The table of sections

2 for subpart C of part IV of subchapter A of chapter 1

3 of the Internal Revenue Code of 1986 is amended by add4 ing after section 35 the following new item:

‘‘Sec. 35A. Dependents under 18.’’

5 (c) CONFORMING AMENDMENT.—Section 6109(e) of

6 such Code (relating to identifying numbers) is amended

7 by inserting ‘‘, or a credit under section 35A for a depend8 ent under 18 years of age,’’ after ‘‘exemption under sec9 tion 151 for any dependent’’.

10 SEC. 4. EFFECTIVE DATE.

11 The amendments made by this Act shall apply with

12 respect to taxable years beginning after December 31,

13 1996.

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