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 ex-
emption for children with a refundable credit for families
and a refundable credit for each child, and for other
purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
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:
‘‘In the case of:
The credit percent-
age is:
The phaseout per-
centage is:
An individual not filing a
joint return ......................
Married 
individuals 
filing
joint return ......................
18.5
‘‘(2) AMOUNTS.—The earned income amount
and the phaseout amount shall be determined as fol-
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.’’
(b) DEFINITION OF ELIGIBLE INDIVIDUAL.—Sub-
section (c)(1)(A) of section 32 of such Code (defining eligi-
ble individual) is amended to read as follows:
‘‘(A) IN GENERAL.—The term ‘eligible in-
dividual’ means any individual who has a quali-
fying 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 in-
come’’ and inserting ‘‘modified adjusted gross in-
come’’.
(2) MODIFIED ADJUSTED GROSS INCOME DE-
FINED.—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 in-
come—
‘‘(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 subpara-
graph are—
‘‘(i) Social Security benefits (as de-
fined in section 86(d)) received by the tax-
payer during the taxable year to the extent
not included in gross income,
‘‘(ii) amounts which—
‘‘(I) are received during the tax-
able 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 in-
strument 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 dur-
ing 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 in-
come.
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 sepa-
rately with respect to—
‘‘(I) trades or businesses (other
than farming) conducted as sole pro-
prietorships,
‘‘(II) trades or businesses of
farming conducted as sole proprietor-
ships, 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 per-
formance of services by the taxpayer as an em-
ployee.’’
(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 RE-
TURN.—Each dollar amount contained in sub-
section (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 de-
termined under section 1(f)(3) less 2 per-
centage 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 de-
termined under section 1(f)(3) plus 1 per-
centage point, for the calendar year in
which the taxable year begins, by sub-
stituting ‘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 RE-
TURN.—The credit percentage contained in sub-
section (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 de-
termined under section 1(f)(3) less 2 per-
centage 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 per-
centage contained in subsection (b)(1) for mar-
ried individuals filing a joint return shall be in-
creased by an amount equal to—
‘‘(i) such credit percentage, multiplied
by
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) plus 1 per-
centage point, for the calendar year in
which the taxable year begins, by sub-
stituting ‘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 DE-
PENDENTS 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 PROVI-
SIONS.—Except as provided in this section,
whenever in this title a provision refers to de-
pendents 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 sec-
tion 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 sub-
chapter A of chapter 1 of the Internal Revenue Code of
1986 (relating to refundable credits) is amended by insert-
ing 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 qualify-
ing 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 al-
lowable 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 pur-
poses of subsection (a)—
‘‘(1) CREDIT
PERCENTAGE
AND
EARNED
IN-
COME
AMOUNT.—The credit percentage and the
earned income amount shall be determined as
follows:
‘‘In the case of:
The credit percent-
age is:
Earned income
amount:
1st and 2nd qualifying child
12.5
$8,000
3rd qualifying child .............
$25,000
4th and each additional
qualifying child ................
3.33
$30,000
‘‘(2) INITIAL PHASEDOWN AMOUNT.—The ini-
tial 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 preced-
ing sentence shall be applied by substituting
‘$1,250’ for ‘$2,500’. In no event shall the ap-
plicable 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 sec-
tion—
‘‘(1) EARNED INCOME.—The term ‘earned in-
come’ 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 in-
dividual 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 add-
ing 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 depend-
ent under 18 years of age,’’ after ‘‘exemption under sec-
tion 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.
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