chapter H (sections 131 and 132). For rules on the with-
holding of tax on nonresident aliens, see chapter 5 (sec-
tions 1441–1464). 
‘‘(d) TAXPAYER.—For purposes of this chapter, ‘tax-
payer’ means an individual, or, in the case of a joint re-
turn, the husband and the wife. 
‘‘SEC. 3. GROSS INCOME. 
‘‘(a) GENERAL DEFINITION.—Except as otherwise 
provided in this chapter, ‘gross income for the taxable 
year’ means all income from whatever source derived by 
a taxpayer during the taxable year, including (but not lim-
ited to) the following items: 
‘‘(1) Compensation for services, including (but 
not limited to)— 
‘‘(A) salaries, 
‘‘(B) wages, 
‘‘(C) commissions, 
‘‘(D) tips, and 
‘‘(E) distributions from business entities 
(as defined in section 171). 
‘‘(2) Fringe benefits (except as specifically ex-
cluded by section 4(a)), including (but not limited 
to)— 
‘‘(A) the cost of health, disability, life or 
other similar insurance paid by an employer if 
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the taxpayer is indirectly or directly the bene-
ficiary of the policy or has the right to name 
the beneficiary of the policy, 
‘‘(B) employer-paid parking (unless the 
employee uses the automobile parked in the 
space regularly on employer business), 
‘‘(C) employer-paid educational benefits, 
‘‘(D) employer-paid housing (other than 
housing provided for the convenience of the em-
ployer), 
‘‘(E) employer-paid meals (other than 
meals provided for the convenience of the em-
ployer or reimbursement for the reasonable cost 
of meals incurred on overnight travel), 
‘‘(F) amounts contributed by an employer 
on behalf of an employee to a group legal serv-
ices plan, and 
‘‘(G) dependent care assistance received 
from an employer. 
‘‘(3) Distributions from business entities (as de-
fined in section 171) constituting— 
‘‘(A) compensation for use of capital, in-
cluding interest, or 
‘‘(B) shares of profits (including divi-
dends). 
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‘‘(4) Interest not described in paragraph (3)(A). 
‘‘(5) Rents. 
‘‘(6) Royalties. 
‘‘(7) Alimony, child support, and separate 
maintenance payments. 
‘‘(8) Includible social security benefits. 
‘‘(9) Income from the discharge of indebted-
ness. 
‘‘(10) Gains on the sale or disposition of assets. 
‘‘(11) Amounts stolen or embezzled. 
‘‘(12) Distributions from retirement plans and 
annuities (other than USA Roth IRAs) to the extent 
not previously included as income, as determined in 
accordance with section 33. 
‘‘(13) Amounts received through health, acci-
dent or disability insurance to the extent that— 
‘‘(A) the cost of such insurance was paid 
by an employer and not included in the employ-
ee’s taxable income and 
‘‘(B) such amounts exceed the actual med-
ical expenses incurred and not paid or treated 
as paid with amounts otherwise excluded from 
income. 
‘‘(b) DEFINITIONS.—For purposes of subsection (a) 
and section 4— 
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‘‘(1) EMPLOYER.—‘Employer’ includes— 
‘‘(A) in the case of a partner who provides 
services for a partnership, the partnership, 
‘‘(B) in the case of a proprietor, the pro-
prietorship, and 
‘‘(C) in the case of an independent con-
tractor, any business or individual that hires 
the independent contractor. 
‘‘(2) SOCIAL SECURITY BENEFITS.— 
‘‘(A) IN GENERAL.—‘Social Security bene-
fits’ means any amount received by the tax-
payer by reason of entitlement to— 
‘‘(i) a monthly benefit under title II of 
the Social Security Act, or 
‘‘(ii) a tier 1 railroad retirement ben-
efit. The amount received by a taxpayer 
shall be determined as if the Social Secu-
rity Act did not contain section 203(i) 
thereof. 
‘‘(B) TIER 1 RAILROAD RETIREMENT BEN-
EFIT.—‘Tier 1 railroad retirement benefit’ 
means— 
‘‘(i) the amount of the annuity under 
the Railroad Retirement Act of 1974 equal 
to the amount of the benefit to which the 
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taxpayer would have been entitled under 
the Social Security Act if all of the service 
after December 31, 1936, of the employee 
(on whose record the annuity is being 
paid) has been included in the term ‘em-
ployment’ as defined in the Social Security 
Act, and 
‘‘(ii) a monthly annuity amount under 
section 3(f)(3) of the Railroad Retirement 
Act of 1974. 
‘‘(C) 
WORKERS’ 
COMPENSATION
SUB-
STITUTES.—If by reason of section 224 of the 
Social Security Act or section 3(a)(1) of the 
Railroad Retirement Act of 1974, any social se-
curity benefit is reduced because of the receipt 
of a benefit under a workers’ compensation act, 
the term ‘social security benefit’ includes that 
portion of such benefit which equals such reduc-
tion. 
‘‘(D) EFFECT OF EARLY PAYMENT.—If so-
cial security benefits checks are delivered before 
the end of the calendar month for which they 
are issued and are not deposited until the 
month for which they are issued, they will be 
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treated as received in the month for which they 
are issued. 
‘‘(3) INCLUDIBLE
SOCIAL
SECURITY
BENE-
FITS.—‘Includible social security benefits’ means the 
portion of social security benefits that would be in-
cluded in gross income under section 86(a) of the 
Internal Revenue Code of 1986, except that for pur-
poses of applying such section, the term ‘modified 
adjusted gross income’ means adjusted gross income 
(as defined in section 1(c)), determined without re-
gard to the inclusion of any social security benefits. 
‘‘(c) PROPERTY RECEIVED FOR SERVICES.— 
‘‘(1) IN GENERAL.—If, in connection with the 
performance of services, property is transferred to 
any person other than the person for whom such 
services are performed, the excess of— 
‘‘(A) the fair market value of such prop-
erty (determined without regard to any restric-
tion other than a restriction which by its terms 
will never lapse) at the first time the rights of 
the person having the beneficial interest in such 
property are transferable or are not subject to 
a substantial risk of forfeiture, whichever oc-
curs earlier, over 
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‘‘(B) the amount (if any) paid for such 
property, shall be included in the gross income 
of the person who performed such services in 
the first taxable year in which the rights of the 
person having the beneficial interest in such 
property are transferable or are not subject to 
a substantial risk of forfeiture, whichever is ap-
plicable. The preceding sentence shall not apply 
if such person sells or otherwise disposes of 
such property in an arm’s length transaction 
before his rights in such property become trans-
ferable or not subject to a substantial risk of 
forfeiture. 
‘‘(2) RULES
AND
REGULATIONS.—The Sec-
retary shall prescribe rules and regulations similar 
to those applicable under section 83 of the Internal 
Revenue Code of 1986 for purposes of implementing 
this subsection. 
‘‘SEC. 4. EXCLUSIONS FROM GROSS INCOME. 
‘‘(a) GENERAL RULE.—Gross income does not in-
clude: 
‘‘(1) RETURNS
OR
BENEFITS
FROM
PRE-
VIOUSLY TAXED INCOME.— 
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‘‘(A) Social security benefits (as defined in 
section 3(b)(2)), other than includible social se-
curity benefits (as defined in section 3(b)(3)). 
‘‘(B) Amounts received under accident or 
health benefit plans (except as provided in sec-
tion 3(a)(13)). 
‘‘(C) Value of services provided pursuant 
to a group legal service plan (but only if the 
cost of such services was paid by the employee 
or paid by the employer and included in the 
gross income of the employee). 
‘‘(D) Amounts received under an insurance 
contract for certain living expenses in the case 
of an individual whose principal residence is 
damaged or destroyed or who is denied access 
because of the threat of such occurrence. 
‘‘(E) Amounts treated as recovery of basis 
under any other provision of chapter 1. 
‘‘(2) COMPENSATION FOR SPECIAL KINDS OF 
SERVICE.— 
‘‘(A) In the case of a minister of the gos-
pel— 
‘‘(i) the rental value of a home fur-
nished to him, or 
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‘‘(ii) the rental allowance paid to him 
as part of his compensation, to the extent 
used by him to rent or provide a home. 
‘‘(B) Certain combat pay of members of 
the Armed Forces of the United States (as pro-
vided in section 92). 
‘‘(C) Certain reduced uniform services re-
tirement pay (as defined in section 122 of the 
Internal Revenue Code of 1986). 
‘‘(D) Qualified military benefits (as defined 
in section 93). 
‘‘(E) Moving allowances for active military 
personnel (as defined in section 217(g) of the 
Internal Revenue Code of 1986). 
‘‘(F) Certain foster care payments (as de-
fined in section 94). 
‘‘(3) GRATUITOUS, CHARITABLE, AND GOVERN-
MENTAL TRANSFERS.— 
‘‘(A) Gifts. 
‘‘(B) Inheritances. 
‘‘(C) Supplemental security income, aid to 
families with dependent children, food stamps, 
section 8 low-income rental assistance, benefits 
under the low-income home energy assistance 
program, and benefits under other similar Fed-
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eral and State assistance programs for low-in-
come individuals and families. 
‘‘(D) Benefits or assistance received from 
a charitable organization as the result of a dis-
aster or by reason of financial need. 
‘‘(4) TAX-EXEMPT
BOND
INTEREST.—Interest 
on State and local bonds (as provided in section 91); 
‘‘(5) COMPENSATION
FOR
INJURY
AND
SICK-
NESS.— 
‘‘(A) Amounts received as compensation 
for personal injury or sickness (as provided in 
section 95). 
‘‘(B) Reimbursement and direct payments 
under Medicare and Medicaid. 
‘‘(6) BENEFITS PRIMARILY FOR THE CONVEN-
IENCE
OF
THE
EMPLOYER
AND
CERTAIN
FRINGE 
BENEFITS.— 
‘‘(A) Meals or lodging furnished for the 
convenience of the employer (as provided in sec-
tion 96). 
‘‘(B) Value of a parking space if employee 
uses the car parked in the space regularly on 
company business. 
‘‘(C) A fringe benefit that is a no-addi-
tional-cost service (as defined in section 97(b)), 
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subject to rules prohibiting discrimination in 
favor of the highly compensated. 
‘‘(D) A qualified employee discount (as de-
fined in section 97(c)), subject to rules prohib-
iting discrimination in favor of the highly com-
pensated. 
‘‘(E) Any property or services provided to 
an employee to the extent that if the employee 
were treated as a business and the business 
paid for those services, the employee could de-
duct the cost of such property or services under 
the business tax. 
‘‘(F) A de minimis fringe benefit (as de-
fined in section 97(d)). 
‘‘(G) Transportation in a commuter high-
way vehicle if such transportation is in connec-
tion with travel between the employee’s resi-
dence and place of employment. 
‘‘(H) Any amount received directly or indi-
rectly by an individual from an employer for 
moving expenses if— 
‘‘(i) the move is associated with a 
change in job locations for the same em-
ployer, and 
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‘‘(ii) the expenses of such move would 
have been deductible under the rules under 
section 217 of the Internal Revenue Code 
of 1986 if paid directly by the employee. 
‘‘(I) Employer provided coverage under an 
accident or health plan. 
‘‘(7) REPAYABLE RECEIPTS.—The proceeds of 
borrowing or any other amounts legally received that 
the taxpayer is legally obligated to return (except 
that the imputed interest rules of section 7872 may 
apply if there is inadequate stated interest). 
‘‘(8) CERTAIN INCOME EARNED ABROAD.—Cer-
tain income and housing costs of citizens and resi-
dents of the United States living outside the United 
States in accordance with the rules under section 
911 of the Internal Revenue Code of 1986. 
‘‘(9) DISCHARGE
OF
INDEBTEDNESS.—The 
amount of indebtedness discharged unless the dis-
charge is for services, property, or other valuable 
right. 
‘‘(10) 
NONRECOGNITION
TRANSACTIONS.— 
Amounts to which the nonrecognition transaction 
rules of section 77 apply. 
‘‘(11) PROCEEDS
FROM
SALE
OF
PRINCIPAL 
RESIDENCE.—Amounts excludable under section 76 
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(relating to certain proceeds from the sale of the 
taxpayer’s principal residence). 
‘‘(12) TAXABLE RECEIPTS OF A BUSINESS EN-
TITY.—Amounts that are treated as taxable receipts 
of a business entity under the Simplified USA Tax 
for businesses and are not distributed to the indi-
vidual taxpayer. 
‘‘(13) QUALIFIED
RETIREMENT
CONTRIBU-
TIONS.—Employer contributions to retirement plans 
that are exempt from taxation under chapter 3, in-
cluding contributions pursuant to a cash or deferred 
payment plan described in section 401(k). 
‘‘(b) CROSS REFERENCES.— 
‘‘(1) ROTH IRAS.—For rules excluding from in-
come earnings on, and distributions from, Roth 
IRAs, see sections 30 and 408A. 
‘‘(2) OTHER RETIREMENT PLANS.—For rules 
excluding or deferring from income earnings on 
other retirement plans, see chapter 3. 
‘‘SEC. 5. ALIMONY AND CHILD SUPPORT DEDUCTIONS. 
‘‘(a) GENERAL RULE.—A taxpayer shall be allowed 
an alimony and child support deductions for an amount 
equal to the alimony, child support, or separate mainte-
nance payments paid during the taxpayer’s taxable year. 
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‘‘(b) DEFINITION
OF ALIMONY, CHILD SUPPORT, 
AND SEPARATE MAINTENANCE PAYMENTS.—‘Alimony, 
child support, and separate maintenance payments’ means 
any alimony, child support, or separate maintenance pay-
ment which is includible in gross income of the recipient 
under section 3. 
‘‘SEC. 6. USA DEDUCTIONS. 
‘‘In computing taxable income, an individual shall be 
entitled to the following deductions: 
‘‘(1) The homeowner deduction described in 
section 7. 
‘‘(2) The education deduction described in sec-
tion 8. 
‘‘(3) The philanthropic transfer deduction de-
scribed in section 9. 
‘‘SEC. 7. HOMEOWNER DEDUCTION. 
‘‘(a) IN GENERAL.—The homeowner deduction shall 
equal the amount of interest paid by the taxpayer during 
the taxable year on acquisition indebtedness with respect 
to any qualified residence of the taxpayer. 
‘‘(b) DEFINITIONS.— 
‘‘(1) ACQUISITION
INDEBTEDNESS.—‘Acquisi-
tion indebtedness’ means any indebtedness that is 
secured by a qualified residence and that— 
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‘‘(A) was incurred in acquiring, con-
structing, or substantially improving the quali-
fied residence, or 
‘‘(B) was incurred to refinance any indebt-
edness that is described in subparagraph (A) or 
this subparagraph (B) but only to the extent 
that the refinancing does not exceed the 
amount refinanced. 
The aggregate amount treated as acquisition indebt-
edness shall not exceed $1,000,000 ($500,000 in the 
case of a married individual filing separately). 
‘‘(2) QUALIFIED RESIDENCE.—‘Qualified resi-
dence’ means the principal residence of the taxpayer 
and 1 other residence of the taxpayer that is des-
ignated by the taxpayer and which— 
‘‘(A) is used by the taxpayer as a residence 
for more than 14 days during such year for 
which such unit is rented, and 
‘‘(B) is not rented for more than 14 days 
during such year. 
‘‘(c) COOPERATIVE HOUSING CORPORATION TEN-
ANT.—Any indebtedness secured by stock held by a tax-
payer as a tenant-stockholder in a cooperative housing cor-
poration shall be treated as secured by the house or apart-
ment which the taxpayer is entitled to occupy as a tenant- 
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stockholder. If such stock cannot be used to secure indebt-
edness, the indebtedness will be treated as so secured if 
the taxpayer establishes that such indebtedness was in-
curred to acquire stock. 
‘‘SEC. 8. EDUCATION DEDUCTION. 
‘‘(a) IN GENERAL.—The education deduction shall 
equal the sum of the qualified educational expenses for 
each eligible student. 
‘‘(b) QUALIFIED EDUCATION EXPENSES.— 
‘‘(1) IN
GENERAL.—‘Qualified education ex-
penses’ means with respect to an eligible student the 
lesser of— 
‘‘(A) $4,000, or 
‘‘(B) the qualified higher education ex-
penses of the eligible student paid by the tax-
payer during the taxable year. 
‘‘(2) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.— 
‘‘(A) IN GENERAL.—‘Qualified higher edu-
cation expenses’ means tuition and fees re-
quired for the enrollment of an eligible student 
at an eligible education institution. Such term 
shall not include expenses with respect to any 
course or other education involving sports, 
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games, or hobbies other than as part of a de-
gree program. 
‘‘(B) ELIGIBLE
EDUCATIONAL
INSTITU-
TION.—‘Eligible 
educational 
institution’ 
means— 
‘‘(i) an institution which is described 
in section 481 of the Higher Education 
Act of 1965 (as in effect on May 15, 
1998), and which is eligible to participate 
in a program under title IV of such Act, 
and 
‘‘(ii) in the case of a student who has 
attained the age of 18 before the beginning 
of the taxable year, and not graduated 
from high school before the beginning of 
the taxable year, an accredited school pro-
viding remedial education. 
‘‘(3) ELIGIBLE
STUDENT.—‘Eligible student’ 
means— 
‘‘(A) the taxpayer, but only if no other tax-
payer treats the taxpayer as a dependent for 
whom a credit is allowed under section 21, 
‘‘(B) the taxpayer’s spouse if a joint return 
is filed, and 
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‘‘(C) any dependent of the taxpayer for 
whom the taxpayer is allowed a credit under 
section 21. 
‘‘(c) LIMITATION.—The maximum education deduc-
tion in a taxable year is $12,000 ($6,000 in the case of 
married individuals filing separate returns). 
‘‘(d) 
INFLATION
ADJUSTMENTS.—The 
dollar 
amounts contained in subsections (b)(1)(A) and (c) shall 
be adjusted for inflation beginning with calendar year 
2008 in accordance with section 25. 
‘‘SEC. 9. PHILANTHROPIC TRANSFER DEDUCTION. 
‘‘(a) IN GENERAL.—The philanthropic transfer de-
duction shall equal the amount of charitable contributions 
made by the taxpayer in the taxable year, subject to the 
limitations in subsection (b). A deduction shall be allow-
able as a deduction only if verified under regulations pre-
scribed by the Secretary. 
‘‘(b) LIMITATION ON AMOUNT.— 
‘‘(1) GENERAL
RULE.—A deduction for con-
tributions to regular charities in any taxable year 
shall be allowed only to the extent that such con-
tributions do not exceed 50 percent of the taxpayer’s 
adjusted gross income. Other charitable contribu-
tions shall be allowed only to the extent that such 
contributions do not exceed the lesser of— 
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value of the property or the taxpayer’s basis in the 
property. 
‘‘(2) FAIR
MARKET
VALUE
DEDUCTIONS
IN 
CERTAIN
CASES.—Notwithstanding paragraph (1), 
in the case of a charitable contribution (other than 
a contribution to a private foundation that is not a 
private operating foundation) of— 
‘‘(A) real property, 
‘‘(B) tangible property if the use by the 
donee is related to its purpose or function con-
stituting the basis for its exemption from the 
business tax or in the case of a governmental 
unit, to any governmental unit, and 
‘‘(C) stocks, bonds, or other securities held 
for more than one year, the amount of the 
charitable contribution shall equal the fair mar-
ket value of the property. 
‘‘(3) CONTRIBUTIONS
OF
STOCK
FOR
WHICH 
MARKET QUOTATIONS ARE READILY AVAILABLE.— 
‘‘(A) IN GENERAL.—In the case of con-
tributions of qualified appreciated stock, para-
graph (2) shall apply without regard to whether 
the stock is contributed to a private foundation. 
‘‘(B) QUALIFIED APPRECIATED STOCK.— 
‘Qualified appreciated stock’ means any stock 
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of a corporation for which (as of the date of the 
contribution) market quotations are readily 
available on an established securities market, 
except that in the case of a donor to a private 
foundation, the term does not include stock to 
the extent that the amount so contributed, 
when increased by prior contributions by the 
donor of stock in the same corporation, exceeds 
10 percent in value of the outstanding stock of 
such corporation. 
‘‘(e) OTHER RULES.—The Secretary shall prescribe 
rules limiting the availability of the philanthropic transfer 
deduction in certain cases, including rules for— 
‘‘(1) contributions of property placed in trust, 
‘‘(2) contributions of partial interests in prop-
erty, 
‘‘(3) contributions subject to liabilities that are 
assumed, 
‘‘(4) out-of-pocket expenditures on behalf of a 
charity to influence legislation, 
‘‘(5) substantiation of contributions in excess of 
$250, 
‘‘(6) contributions designated for lobbying activ-
ity, 
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‘‘(7) amounts paid to maintain certain students 
as members of taxpayer’s household, 
‘‘(8) qualified conservation contributions, and 
‘‘(9) deductions for travel expenses on behalf of 
a charity where there is a significant element of per-
sonal pleasure. 
‘‘SEC. 10. LIMITATION ON DEDUCTIONS. 
‘‘(a) IN GENERAL.—A taxpayer’s deductions shall 
not reduce the taxpayer’s taxable income below zero. Ex-
cept as provided in section 9(b) (relating to the limitation 
on the philanthropic transfer deduction), a taxpayer shall 
not be entitled to carry over any unused deductions. 
‘‘(b) DEDUCTIONS.—For purposes of this section, 
‘deductions’ means— 
‘‘(1) the alimony and child support deductions, 
‘‘(2) the USA deductions, and 
‘‘(3) the qualified IRA deduction. 
‘‘SEC. 15. TAX RATES. 
‘‘(a) MARRIED INDIVIDUALS FILING JOINT RETURNS 
AND SURVIVING SPOUSES.—The tax schedule for every 
married individual who files a joint return with a spouse 
and for every surviving spouse (as defined in section 
17(a)) is— 
‘‘If taxable income is: 
The tax is: 
Not over $40,000 ..........................
15% of taxable income.
Over 
$40,000, 
but 
not 
over 
$80,000.
$6,000, plus 25% of the excess over 
$40,000.
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‘‘If taxable income is: 
The tax is: 
Over $80,000 .................................
$16,000, plus 30% of the excess over 
$80,000. 
‘‘(b) HEADS OF HOUSEHOLDS.—The tax schedule for 
every head of household (as defined in section 17(b)) is— 
‘‘If taxable income is: 
The tax is: 
Not over $35,000 ..........................
15% of taxable income.
Over 
$35,000, 
but 
not 
over 
$70,000.
$5,250, plus 25% of the excess over 
$35,000.
Over $70,000 .................................
$14,000, plus 30% of the excess over 
$70,000. 
‘‘(c) UNMARRIED INDIVIDUALS.—The tax schedule 
for an unmarried individual who is not a head of a house-
hold or a surviving spouse is— 
‘‘If taxable income is: 
The tax is: 
Not over $24,000 ..........................
15% of taxable income.
Over 
$24,000, 
but 
not 
over 
$48,000.
$3,600, plus 25% of the excess over 
$24,000.
Over $48,000 .................................
$9,600, plus 30% of the excess over 
$48,000. 
‘‘(d) MARRIED INDIVIDUALS FILING SEPARATE RE-
TURNS.—The tax schedule for a married individual filing 
a separate return is— 
‘‘If taxable income is: 
The tax is: 
Not over $20,000 ..........................
15% of taxable income.
Over 
$20,000, 
but 
not 
over 
$40,000.
$3,000, plus 25% of the excess over 
$20,000.
Over $40,000 .................................
$8,000, plus 30% of the excess over 
$40,000. 
‘‘(e) ADJUSTMENTS
FOR
INFLATION.—Beginning 
with calendar year 2008, the tax schedules in subsections 
(a) through (d) shall be adjusted so that inflation will not 
result in tax increases in accordance with the procedures 
under section 25. 
‘‘(f) MAXIMUM RATE FOR INVESTMENT INCOME.— 
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‘‘(1) IN GENERAL.—If a taxpayer has a net in-
vestment income for any taxable year, the tax im-
posed by this section for such taxable year shall not 
exceed the sum of— 
‘‘(A) a tax computed at the rates and in 
the same manner as if this subsection had not 
been enacted on taxable income reduced by net 
capital gain, or if greater, on the lesser of— 
‘‘(i) taxable income, or 
‘‘(ii) taxable income reduced by net 
capital gain, and 
‘‘(B) 15 percent of net investment income. 
‘‘(2) NET INVESTMENT INCOME.—For purposes 
of paragraph (1), the term ‘net investment income’ 
means the excess of— 
‘‘(A) the sum of amounts includible in 
gross income which is— 
‘‘(i) a distribution from business enti-
ties (as defined in section 171) consti-
tuting shares of profits (including divi-
dends), and 
‘‘(ii) gain on the sale or disposition of 
any asset, over 
‘‘(B) any amount realized which is a loss 
on the sale or disposition of any asset. 
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‘‘(g) DEFINITIONS.—See section 17 for rules on filing 
status. 
‘‘SEC. 16. KIDDIE TAX. 
‘‘(a) GENERAL RULE.—If a child has a living parent 
and net unearned income and the child has not attained 
the age of 14 before the close of the taxable year— 
‘‘(1) the net unearned income of the child shall 
be included in the taxable income of the eligible par-
ent for purposes of determining the parent’s tax li-
ability, or 
‘‘(2) the tax calculated under the tax rate 
schedules for the child as a separate taxpayer shall 
not be less than the sum of— 
‘‘(A) the tax which would have been deter-
mined under the rate schedule if the taxable in-
come of the child were reduced by the net un-
earned income of the child, plus 
‘‘(B) such child’s share of the allocable pa-
rental tax. 
‘‘(b) CHILD’S SHARE
OF ALLOCABLE PARENTAL 
TAX.— 
‘‘(1) ALLOCABLE
PARENTAL
TAX.—‘Allocable 
parental tax’ means the excess of— 
‘‘(A) the tax that would have been deter-
mined under the rate schedules on the eligible 
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‘‘(1) the adjusted gross income of the child, 
over 
‘‘(2) the sum of— 
‘‘(A) the earned income (as defined in sec-
tion 171(a)(6)) of the child, and 
‘‘(B) $2,500. 
‘‘SEC. 17. RULES FOR FILING STATUS AND RATE TABLES. 
‘‘(a) DEFINITION OF SURVIVING SPOUSE.— 
‘‘(1) IN GENERAL.—‘Surviving spouse’ means 
an individual— 
‘‘(A) whose spouse died during either of 
his 2 calendar years immediately preceding the 
calendar year, and 
‘‘(B) who maintains as his home a house-
hold which constitutes for the taxable year the 
principal place of abode (as a member of such 
household) of a dependent— 
‘‘(i) who is a qualifying child (as de-
fined in section 21) of the taxpayer, and 
‘‘(ii) for whom the taxpayer is allowed 
a credit for the taxable year under section 
21. 
For purposes of this paragraph, an individual shall 
be considered as maintaining a household only if 
over half of the cost of maintaining the household 
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during the taxable year is furnished by such indi-
vidual. 
‘‘(2) 
LIMITATIONS.—Notwithstanding 
para-
graph (1), for purposes of section 15, an individual 
shall not be considered to be a surviving spouse— 
‘‘(A) if the individual has remarried at any 
time before the close of the taxable year, or 
‘‘(B) unless, for the individual’s taxable 
year during which his spouse died, a joint re-
turn could have been made under the provisions 
of section 6013 (without regard to subsection 
(a)(3) thereof). 
‘‘(3) SPECIAL RULE WHERE DECEASED SPOUSE 
WAS IN MISSING STATUS.—If an individual was in a 
missing status (within the meaning of section 
6013(f)(3)) as a result of service in a combat zone 
and if such individual remains in such status until 
the date referred to in subparagraph (A) or (B), 
then, for purposes of paragraph (1)(A), the date on 
which such individual died shall be treated as the 
earlier of the date determined under subparagraph 
(A) or the date determined under subparagraph (B): 
‘‘(A) the date on which the determination 
is made under section 556 of title 37 of the 
United States Code or under section 5566 of 
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title 5 of such Code (whichever is applicable) 
that such individual died while in such missing 
status, or 
‘‘(B) the date which is 2 years after the 
date designated under section 92 (relating to 
exemption for combat zones) as the date of ter-
mination of combatant activities in that zone. 
‘‘(b) DEFINITION OF HEAD OF HOUSEHOLD.— 
‘‘(1) IN GENERAL.—An individual shall be con-
sidered a head of a household if, and only if, such 
individual is not married at the close of his taxable 
year, is not a surviving spouse (as defined in sub-
section (a)), and either— 
‘‘(A) maintains as his home a household 
which constitutes for more than one-half of 
such taxable year the principal place of abode, 
as a member of such household, of— 
‘‘(i) a son, stepson, daughter, or step-
daughter of the taxpayer, or a descendant 
of a son or daughter of the taxpayer, but 
if such son, stepson, daughter, step-
daughter, or descendant is married at the 
close of the taxpayer’s taxable year, only if 
the taxpayer is entitled to claim such per-
son as a credit for the taxable year under 
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section 21 (or would be so entitled but for 
the release of a claim under section 152(e) 
of the Internal Revenue Code of 1986 by 
the custodial parent), 
‘‘(ii) any other person who is a de-
pendent of the taxpayer, if the taxpayer is 
allowed a credit for such person under sec-
tion 21for the taxable year, or 
‘‘(B) maintains a household which con-
stitutes for such taxable year the principal place 
of abode of the father or mother of the tax-
payer, if the taxpayer is entitled to a credit 
under section 21 for the taxable year for such 
father or mother. 
For purposes of this paragraph, an individual shall 
be considered as maintaining a household only if 
over half of the cost of maintaining the household 
during the taxable year is furnished by such indi-
vidual. 
‘‘(2) DETERMINATION
OF
STATUS.—For pur-
poses of this subsection— 
‘‘(A) a legally adopted child of a person 
shall be considered a child of such person by 
blood; 
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‘‘(B) an individual who is legally separated 
from his spouse under a decree of divorce or of 
separate maintenance shall not be considered as 
married; 
‘‘(C) a taxpayer shall be considered as not 
married at the close of his taxable year if at 
any time during the taxable year his spouse is 
a nonresident alien; and 
‘‘(D) a taxpayer shall be considered as 
married at the close of his taxable year if his 
spouse (other than a spouse described in sub-
paragraph (C)) died during the taxable year. 
‘‘(3) 
LIMITATIONS.—Notwithstanding 
para-
graph (1), for purposes of this chapter, a taxpayer 
shall not be considered to be a head of a house-
hold— 
‘‘(A) if at any time during the taxable year 
he is a nonresident alien; or 
‘‘(B) by reason of an individual who would 
not be a dependent for the taxable year but 
for— 
‘‘(i) subparagraph (H) of section 
152(d)(2) of the Internal Revenue Code of 
1986, or 
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‘‘(ii) multiple support rules prescribed 
by the Secretary. 
‘‘(c) 
CERTAIN
MARRIED
INDIVIDUALS
LIVING 
APART.—For purposes of this part, an individual shall be 
treated as not married at the close of the taxable year 
if such individual is so treated under the provisions of sec-
tion 7703(b). 
‘‘(d) NONRESIDENT ALIENS.—In the case of a non-
resident alien individual, the taxes imposed by section 1 
shall not apply. 
‘‘SEC. 20. USA TAX CREDITS. 
‘‘(a) IN GENERAL.—The USA tax credits are and 
shall be applied in the following order: 
‘‘(1) The family tax credit under section 21. 
‘‘(2) The work tax credit under section 22. 
‘‘(3) The foreign tax credit as prescribed by the 
Secretary under rules similar to the rules of subpart 
A of part III of subchapter N of chapter 1 of the 
Internal Revenue Code of 1986, but only with re-
spect to foreign taxes on amounts that are included 
in the gross income of the taxpayer. 
‘‘(4) The payroll tax credit under section 23. 
‘‘(5) The taxes-paid tax credit under section 24. 
‘‘(b) REFUNDABLE CREDITS.—If a taxpayer’s USA 
tax credits (other than the family tax credit and the for-
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‘‘(i) work income (or modified taxable 
income, if less), over 
‘‘(ii) $8,000, and 
‘‘(B) $2,600. 
‘‘(3) PHASEOUT.—The additional work tax 
credit amount determined under paragraphs (1) and 
(2) shall be reduced (but not below zero) by 12.5 
percent of the excess of— 
‘‘(A) work income (or modified taxable in-
come, if greater), over 
‘‘(B) $17,000 (or $21,000 in the case of a 
joint return). 
‘‘(e) RULES RELATING TO INCOME.—For purposes of 
this section— 
‘‘(1) WORK INCOME.—The term ‘work income’ 
means the sum of— 
‘‘(A) taxable wages and salaries, 
‘‘(B) self-employment income, 
‘‘(C) labor income for a statutory em-
ployee, and 
‘‘(D) at the election of the taxpayer, com-
bat pay excluded from income by section 4. 
‘‘(2) MODIFIED TAXABLE INCOME.—The term 
‘modified taxable income’ means taxable income in-
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creased by net investment income (as defined by sec-
tion 15), dividends, and tax-exempt bond interest. 
‘‘(f) DEPENDENT; QUALIFYING CHILD.—For pur-
poses of this section, the terms ‘dependent’ and ‘qualifying 
child’ shall have the meaning given such terms by section 
152 of the Internal Revenue Code of 1986. 
‘‘SEC. 23. PAYROLL TAX CREDIT. 
‘‘(a) IN GENERAL.—A taxpayer shall be allowed a 
payroll tax credit in an amount equal to the sum of— 
‘‘(1) the employee’s share of the basic FICA 
tax, 
‘‘(2) the employee’s share of the basic Tier 1 
railroad retirement tax, and 
‘‘(3) one-half of the basic SECA tax payable 
with respect to the taxpayer’s compensation or earn-
ings during the taxable year. 
‘‘(b) DEFINITIONS.— 
‘‘(1) EMPLOYEE’S SHARE OF THE BASIC FICA 
TAX.—‘Employee’s share of the basic FICA tax’ 
means the old-age, survivors and disability insurance 
tax imposed by section 3101(a) and the portion of 
the hospital insurance tax imposed by section 
3101(b) that is attributable to the wage base on 
which the section 3101(a) tax is imposed. 
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‘‘(2) EMPLOYEE’S SHARE OF THE BASIC TIER 1 
RAILROAD RETIREMENT TAX.—Employee’s share of 
the basic Tier 1 railroad retirement tax’ means— 
‘‘(A) the portion of the tax imposed by sec-
tion 3201 with respect to compensation below 
the applicable base (as defined in section 
3231(e)(2)); and 
‘‘(B) the portion of the tax imposed by sec-
tion 3211(a)(1) on railroad employee represent-
atives attributable to the tax imposed by section 
3101(a) and the portion of the hospital insur-
ance tax imposed by section 3101(b) that is at-
tributable to the wage base on which the section 
3101(a) tax is imposed. 
‘‘(3) BASIC
SECA
TAX.—‘Basic SECA tax’ 
means the old-age, survivors and disability insurance 
tax imposed by section 1401(a) on self-employment 
income and the portion of the hospital insurance tax 
imposed by section 1401(b) on self-employment in-
come that is attributable to the amount of self-em-
ployment income (as determined under section 
1402(b)) on which the section 1401(a) tax is im-
posed. 
‘‘(c) NO CREDIT FOR REFUNDABLE TAX.—No credit 
shall be allowed with respect to any FICA tax or railroad 
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retirement tax for which a taxpayer is entitled to a refund 
because of overpayment of tax on the applicable wage 
base. 
‘‘SEC. 24. TAXES-PAID TAX CREDIT. 
‘‘The taxes-paid tax credit shall equal the sum of: 
‘‘(1) WAGE WITHHOLDING.—The amount with-
held as tax under chapter 24. 
‘‘(2) SPECIAL REFUNDS OF SOCIAL SECURITY 
TAX WHEN WAGES EARNED FROM MORE THAN 1 EM-
PLOYER.—The amount allowable under section 
6413(c) as a special refund of taxes imposed on 
wages. 
‘‘(3) OVERPAYMENTS
OF
PRIOR-YEAR
TAX.— 
Any overpayment of a prior tax obligation that the 
taxpayer or the Secretary applies to the tax for the 
taxable year. 
‘‘(4) ESTIMATED TAXES.—Any estimated taxes 
paid by the taxpayer with respect to the taxpayer’s 
tax liability for the taxable year which are treated as 
payment on account of income tax for purposes of 
section 6315 (relating to estimated taxes). 
‘‘SEC. 25. INDEXING FOR INFLATION. 
‘‘(a) PUBLICATION OF TABLES AND NUMBERS.—Not 
later than December 15 of 2006, and each subsequent cal-
endar year, the Secretary shall prescribe tables and dollar 
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amounts which shall apply in the immediately following 
calendar year in lieu of the tables and dollar amounts that 
are required to be adjusted for inflation in accordance with 
this section. 
‘‘(b) METHOD OF ADJUSTMENT.— 
‘‘(1) IN GENERAL.—The dollar amounts which 
are required to be adjusted pursuant to this section 
for a calendar year shall be the dollar amounts as 
stated in this chapter multiplied by the cost of living 
adjustment for such calendar year, rounded as pro-
vided in subsection (d). 
‘‘(2) TAX RATE TABLES.—In the case of a tax 
rate table, the dollar amounts to be adjusted in ac-
cordance with paragraph (1) are the minimum and 
maximum dollar amounts for each rate bracket for 
which a tax is imposed. The amounts setting forth 
the bottom tax for each bracket shall be adjusted to 
the extent necessary to reflect the adjustments in 
the rate brackets. 
‘‘(c) COST-OF-LIVING ADJUSTMENT.— 
‘‘(1) IN GENERAL.—The cost-of-living adjust-
ment for any calendar year is the percentage (if any) 
by which— 
‘‘(A) the CPI for the preceding calendar 
year, exceeds 
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‘‘(B) the CPI for the calendar year 2006. 
‘‘(2) CPI FOR ANY CALENDAR YEAR.—For pur-
poses of paragraph (1), the CPI for any calendar 
year is the average of the Consumer Price Index as 
of the close of the 12-month period ending on Au-
gust 31 of such calendar year. 
‘‘(3) CONSUMER PRICE INDEX.—For purposes 
of paragraph (2), ‘Consumer Price Index’ means the 
last Consumer Price Index for all-urban consumers 
published by the Department of Labor. For pur-
poses of the preceding sentence, the revision of the 
Consumer Price Index which is most consistent with 
the Consumer Price Index for calendar year 2006 
shall be used. 
‘‘(d) ROUNDING.— 
‘‘(1) IN GENERAL.—If any increase determined 
under subsection (b) is not a multiple of $50, such 
increase shall be rounded to the next lowest multiple 
of $50. 
‘‘(2) MULTIPLES OF $25.—Paragraph (1) shall 
be applied by substituting ‘$25’ for ‘$50’ in the case 
of— 
‘‘(A) amounts for married individuals filing 
separately, and 
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‘‘(B) any other dollar amount that is to be 
adjusted for inflation if that dollar amount is 
less than $1,000. 
‘‘Subchapter B—Roth IRA and Other Savings 
Provisions 
‘‘Sec. 30. Roth IRAs. 
‘‘Sec. 31. Deductible IRAs. 
‘‘Sec. 32. Effect of repeal of special savings provisions. 
‘‘SEC. 30. ROTH IRAS. 
‘‘(a) GENERAL RULE.—Except as provided in this 
section, a Roth IRA shall be treated for purposes of this 
title in the same manner as an individual retirement plan. 
‘‘(b) ROTH IRA.—‘Roth IRA’ means an individual 
retirement plan (as defined in section 7701(a)(37)) which 
is designated (in such manner as the Secretary may pre-
scribe) at the time of establishment of the plan as a Roth 
IRA. Such designation shall be made in such manner as 
the Secretary may prescribe. 
‘‘(c) TREATMENT OF CONTRIBUTIONS.— 
‘‘(1) NO DEDUCTION ALLOWED.—No deduction 
shall be allowed for a contribution to a Roth IRA. 
‘‘(2) CONTRIBUTION
LIMIT.—The aggregate 
amount of contributions for any taxable year to all 
Roth IRAs maintained for the benefit of an indi-
vidual (or, in the case of individuals filing a joint re-
turn, either spouse) shall not exceed the taxpayer’s 
adjusted gross income for the taxable year. 
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‘‘(3) ROLLOVER FROM IRA.— 
‘‘(A) 
ROLLOVER
CONTRIBUTIONS.—No 
rollover contribution may be made to a Roth 
IRA unless it is a qualified rollover contribu-
tion. 
‘‘(B) LIMITS.—A taxpayer shall not be al-
lowed to make a qualified rollover contribution 
to a Roth IRA from an individual retirement 
plan other than a Roth IRA during any taxable 
year if— 
‘‘(i) the taxpayer’s adjusted gross in-
come for such taxable year exceeds 
$100,000, or 
‘‘(ii) the taxpayer is a married indi-
vidual filing a separate return. 
‘‘(C) MARITAL STATUS.—Section 31(g)(4) 
shall apply for purposes of this paragraph. 
‘‘(4) CONTRIBUTIONS PERMITTED AFTER AGE 
701⁄2.—Contributions to a Roth IRA may be made 
even after the individual for whom the account is 
maintained has attained age 701⁄2. 
‘‘(5) MANDATORY
DISTRIBUTION
RULES
NOT 
TO APPLY BEFORE DEATH.—Notwithstanding sub-
sections (a)(6) and (b)(3) of section 408 (relating to 
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required distributions), the following provisions shall 
not apply to any Roth IRA: 
‘‘(A) Section 401(a)(9)(A). 
‘‘(B) The incidental death benefit require-
ments of section 401(a). 
‘‘(6) TIME
WHEN
CONTRIBUTIONS
MADE.—A 
taxpayer shall be deemed to have made a contribu-
tion to a Roth IRA during a year if the contribution 
is made on account of such year and is made not 
later than April 15 of the following year. 
‘‘(d) EXCLUSION FROM INCOME.—For purposes of 
this chapter— 
‘‘(1) GENERAL RULES.—A distribution from a 
Roth IRA shall not be includible in gross income. 
‘‘(2) 
NONQUALIFIED
DISTRIBUTION.—The 
automatic exclusion from gross income under para-
graph (1) shall not apply to any distribution, other 
than a qualified special purpose distribution if— 
‘‘(A) it is made within the 5-taxable year 
period beginning with the 1st taxable year for 
which the individual made a contribution to a 
Roth IRA (or such individual’s spouse made a 
contribution to a Roth IRA) established for 
such individual, or 
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‘‘(B) in the case of a payment or distribu-
tion properly allocable (as determined in the 
manner prescribed by the Secretary) to a quali-
fied rollover contribution from an individual re-
tirement plan other than a Roth IRA (or in-
come allocable thereto), it is made within the 5- 
taxable year period beginning with the taxable 
year in which the rollover contribution was 
made. 
‘‘(3) NONQUALIFIED
DISTRIBUTIONS.—In ap-
plying section 33 to any distribution from a Roth 
IRA described in paragraph (2), such distribution 
shall be treated as made from contributions to the 
Roth IRA to the extent that such distribution, when 
added to all previous distributions from the Roth 
IRA, does not exceed the aggregate amount of con-
tributions to the Roth IRA. Only distributions at-
tributable to earnings on accounts (as opposed to 
distributions of contributions) shall be included in 
gross income. 
‘‘(4) ROLLOVERS FROM AN IRA OTHER THAN A 
ROTH IRA.— 
‘‘(A) IN GENERAL.—Notwithstanding sec-
tion 408(d)(3), in the case of any distribution 
to which this paragraph applies there shall be 
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included in gross income any amount which 
would be includible were it not part of a quali-
fied rollover contribution. 
‘‘(B) DISTRIBUTIONS
TO
WHICH
PARA-
GRAPH APPLIES.—This paragraph shall apply 
to a distribution from an individual retirement 
plan (other than a Roth IRA) maintained for 
the benefit of an individual which is contributed 
to a Roth IRA maintained for the benefit of 
such individual in a qualified rollover contribu-
tion. 
‘‘(C) CONVERSIONS.—The conversion of an 
individual retirement plan (other than a Roth 
IRA) to a Roth IRA shall be treated for pur-
poses of this paragraph as a distribution to 
which this paragraph applies. 
‘‘(D) CONVERSION OF EXCESS CONTRIBU-
TIONS.—If, no later than the due date for filing 
the return of tax for any taxable year (without 
regard to extensions), an individual transfers, 
from an individual retirement plan (other than 
a Roth IRA), contributions for such taxable 
year (and any earnings allocable thereto) to a 
Roth IRA, no such amount shall be includible 
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in gross income to the extent no deduction was 
allowed with respect to such amount. 
‘‘(E) ADDITIONAL
REPORTING
REQUIRE-
MENTS.—Trustees of Roth IRAs, trustees of in-
dividual retirement plans, or both, whichever is 
appropriate, shall include such additional infor-
mation in reports required under section 408(i) 
as the Secretary may require to ensure that 
amounts required to be included in gross in-
come under subparagraph (A) are so included. 
‘‘(5) COORDINATION WITH INDIVIDUAL RETIRE-
MENT ACCOUNTS.—Section 408(d)(2) shall be ap-
plied separately with respect to Roth IRAs and other 
individual retirement plans. 
‘‘(6) QUALIFIED SPECIAL PURPOSE DISTRIBU-
TION.—‘Qualified 
special 
purpose 
distribution’ 
means— 
‘‘(i) DISTRIBUTIONS
UPON
DEATH.—Dis-
tributions made to a beneficiary (or to the es-
tate of the individual) on or after the death of 
the individual. 
‘‘(ii) DISTRIBUTIONS UPON DISABILITY.— 
Distributions attributable to the individual’s 
being disabled. 
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‘‘(iii) DISTRIBUTIONS TO PAY MEDICAL EX-
PENSES.—Distributions made to the individual 
for amounts paid during the year for medical 
care, but only to the extent that the amounts 
paid for medical care exceed 7.5% of the ad-
justed gross income of the taxpayer (determined 
without regard to whether the employee 
itemizes deductions for such taxable year). 
‘‘(iv) QDRO.—Any distribution to an al-
ternate payee pursuant to a qualified domestic 
relations order (within the meaning of section 
414(p)(1)). 
‘‘(v) DISTRIBUTIONS TO UNEMPLOYED IN-
DIVIDUALS
FOR
HEALTH
INSURANCE
PRE-
MIUMS.—Distributions to an individual— 
‘‘(I) if such individual has received 
unemployment compensation for 12 con-
secutive weeks under any Federal or State 
unemployment compensation law by reason 
of such separation (or in the case of a self- 
employed individual, to the extent provided 
in regulations, if the individual would have 
received unemployment compensation but 
for the fact the individual was self-em-
ployed), 
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‘‘(II) if such distributions are made 
during any taxable year during which such 
unemployment compensation is paid or the 
succeeding taxable year, 
‘‘(III) to the extent such distributions 
do not exceed the amount paid during the 
taxable year for insurance for the diag-
nosis, cure, mitigation, treatment, or pre-
vention of disease, or for the purpose of af-
fecting any structure or function of the 
body (or for transportation primarily for 
and essential to such medical care) (includ-
ing amounts paid as premiums under part 
B of title XVIII of the Social Security Act, 
relating to supplementary medical insur-
ance for the aged) or for any qualified 
long-term care insurance contract (as de-
fined in section 7702B(b)) with respect to 
the individual and the individual’s spouse 
and dependents, and 
‘‘(IV) such distributions are not made 
after the individual has been employed for 
at least 60 days after the separation from 
employment to which clause (I) applies. 
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‘‘(vi) DISTRIBUTIONS
TO
PAY
HIGHER 
EDUCATION
EXPENSES.—Distributions to the 
extent such distributions do not exceed the 
qualified higher education expenses (as defined 
in section 8(a)(2)) of— 
‘‘(I) the taxpayer, 
‘‘(II) the taxpayer’s spouse, or 
‘‘(III) any child or grandchild of the 
taxpayer or the taxpayer’s spouse. 
‘‘(vii) 
DISTRIBUTIONS
FOR
FIRST 
HOME
PURCHASES.—Distributions which 
are qualified first-time homebuyer distribu-
tions (as defined in paragraph (6)). 
‘‘(7) QUALIFIED FIRST-TIME HOMEBUYER DIS-
TRIBUTIONS.— 
‘‘(A) IN
GENERAL.—‘Qualified first-time 
homebuyer distribution’ means any payment or 
distribution received by an individual to the ex-
tent such payment or distribution is used by the 
individual before the close of the 120th day 
after the day on which such payment or dis-
tribution is received to pay qualified acquisition 
costs with respect to a principal residence of a 
first-time homebuyer who is such individual, the 
spouse of such individual, or any child, grand-
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child, or ancestor of such individual or the indi-
vidual’s spouse. 
‘‘(B) LIFETIME
DOLLAR
LIMITATION.— 
The aggregate amount of payments or distribu-
tions received by an individual which may be 
treated as qualified first-time homebuyer dis-
tributions for any taxable year shall not exceed 
the excess (if any) of— 
‘‘(i) $10,000, over 
‘‘(ii) the aggregate amounts treated as 
qualified first-time homebuyer distributions 
with respect to such individual for all prior 
taxable years. 
‘‘(C) QUALIFIED
ACQUISITION
COSTS.— 
‘Qualified acquisition costs’ means the costs of 
acquiring, constructing, or reconstructing a res-
idence. Such term includes any usual or reason-
able settlement, financing, or other closing 
costs. 
‘‘(D) FIRST-TIME
HOMEBUYER; 
OTHER 
DEFINITIONS.—For purposes of this para-
graph— 
‘‘(i) 
FIRST-TIME
HOMEBUYER.— 
‘First-time homebuyer’ means any indi-
vidual if such individual (and if married, 
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such individual’s spouse) had no present 
ownership interest in a principal residence 
during the 2-year period ending on the 
date of acquisition of the principal resi-
dence to which this paragraph applies, and 
‘‘(ii) DATE
OF
ACQUISITION.—‘Date 
of acquisition’ means the date— 
‘‘(I) on which a binding contract 
to acquire the principal residence to 
which subparagraph (A) applies is en-
tered into, or 
‘‘(II) on which construction or re-
construction of such a principal resi-
dence is commenced. 
‘‘(E) SPECIAL RULE WHERE DELAY IN AC-
QUISITION.—The Secretary shall prescribe rules 
under which a distribution will not be penalized 
if made in anticipation of being a qualified 
first-time homeowner distribution but construc-
tion delays or other unanticipated factors delay 
the closing. 
‘‘(e) QUALIFIED ROLLOVER CONTRIBUTION.—For 
purposes of this section, the term qualified rollover con-
tribution means a rollover contribution to a Roth IRA 
from another such account, or from an individual retire-
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ment plan, but only if such rollover contribution meets the 
requirements of section 408(d)(3). For purposes of section 
408(d)(3)(B), there shall be disregarded any qualified roll-
over contribution from an individual retirement plan 
(other than a Roth IRA) to a Roth IRA. 
‘‘(f) PERMITTED INVESTMENTS.— 
‘‘(1) INVESTMENT PERMITTED.—A Roth IRA 
shall not cease to be an individual retirement ac-
count pursuant to section 408(e)(2) solely because 
funds from such account are used to make a debt 
or equity investment in a controlled business entity. 
‘‘(2) LOANS TO A CONTROLLED BUSINESS ENTI-
TY.— 
‘‘(A) EXCESS
RETURN.—If funds in a 
Roth IRA are loaned to a controlled business 
entity, any return on such loans in excess of a 
fair return shall be treated as gross income of 
the beneficiary that is then deposited in the 
Roth IRA. 
‘‘(B) LOAN.—For purposes of this section, 
an amount shall be treated as loaned to a con-
trolled business entity only if— 
‘‘(i) the amount is treated in the 
books and records of the business entity as 
a loan, 
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‘‘(ii) the transaction is reflected in a 
written note or other evidence of indebted-
ness, and 
‘‘(iii) the business entity is required to 
pay interest at least once per year and at 
the time such loan is made it is reasonable 
to expect that such interest will be paid on 
a timely basis. 
‘‘(C) FAIR RETURN.—For purposes of this 
subsection, a ‘fair return’ with respect to a loan 
is interest at a rate not in excess of 3 percent-
age points plus the minimum rate of interest 
that would have to be charged with respect to 
such loan to prevent it from being a below-mar-
ket loan for purposes of section 7872 (deter-
mined as if section 7872 applied to such loan). 
‘‘(3) EQUITY INVESTMENT IN A CONTROLLED 
BUSINESS ENTITY.—If funds in a Roth IRA are con-
tributed to the capital of, applied to acquire stock or 
other equity interest in, or otherwise transferred to, 
a controlled business entity in a transaction that is 
not considered a loan for purposes of this sub-
section, any return on such equity shall be treated 
as gross income of the beneficiary that is then de-
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posited in the Roth IRA. The preceding sentence 
shall not apply to— 
‘‘(A) the proceeds of the sale of such eq-
uity interest to a third party, or 
‘‘(B) the proceeds received by the Roth 
IRA as the result of a complete redemption of 
the beneficiary’s interest in the business entity 
(including any interests held through a Roth 
IRA). 
‘‘(4) CONTROLLED
BUSINESS
ENTITY.—‘Con-
trolled business entity’ means any business entity in 
which the beneficiary of the Roth IRA holds at least 
a 5 percent interest in the profits and losses (after 
taking into account the investment through the Roth 
IRA) and in which an investment would cause the 
Roth IRA to cease to be an individual retirement ac-
count by reason of section 408(e)(2) but for this 
subsection. 
‘‘(5) APPLICATION OF SECTION 4975.—Section 
4975 shall not apply to a loan or equity investment 
by a Roth IRA in a controlled business entity. 
‘‘(6) TAX AND PENALTY AVOIDANCE.—The Sec-
retary shall prescribe regulations that prohibit the 
provisions of this subsection to be used to cir-
cumvent the application of subsection (d)(2) (relat-
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ing to taxable distributions). The regulations shall 
not prohibit bona fide investments in controlled busi-
ness entities. The regulations shall address loans to 
and investments in a controlled business entity that 
are used to fund distributions or dividends from the 
business entity to the account beneficiary or a mem-
ber of the beneficiary’s family. 
‘‘SEC. 31. DEDUCTIBLE IRAS. 
‘‘(a) ALLOWANCE OF DEDUCTION.—The ‘qualified 
IRA deduction’ shall be an amount equal to the qualified 
retirement contributions of the individual for the taxable 
year, except as limited by subsection (b). 
‘‘(b) MAXIMUM AMOUNT OF DEDUCTION.— 
‘‘(1) IN GENERAL.—The amount allowable as a 
deduction under subsection (a) to any individual for 
any taxable year shall not exceed the lesser of— 
‘‘(A) $2,000, or 
‘‘(B) an amount equal to the compensation 
includible in the individual’s gross income for 
such taxable year. 
‘‘(2) SPECIAL RULE FOR EMPLOYER CONTRIBU-
TIONS UNDER SIMPLIFIED EMPLOYEE PENSIONS.— 
This section shall not apply with respect to an em-
ployer contribution to a simplified employee pension. 
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‘‘(3) 
GRANDFATHERED
PLANS.—Notwith-
standing paragraph (1), the amount allowable as a 
deduction under subsection (a) with respect to any 
contributions on behalf of an employee to a plan de-
scribed in section 501(c)(18) of the Internal Rev-
enue Code of 1986 shall not exceed the lesser of— 
‘‘(A) $7,000, or 
‘‘(B) an amount equal to 25 percent of the 
compensation (as defined in section 415(c)(3)) 
includible in the individual’s gross income for 
such taxable year. 
‘‘(4) SPECIAL RULE FOR SIMPLE RETIREMENT 
ACCOUNTS.—This section shall not apply with re-
spect to any amount contributed to a simple retire-
ment account established under section 408(p). 
‘‘(c) SPECIAL RULES FOR CERTAIN MARRIED INDI-
VIDUALS.— 
‘‘(1) IN GENERAL.—In the case of an individual 
to whom this paragraph applies for the taxable year, 
the limitation of paragraph (1) of subsection (b) 
shall be equal to the lesser of— 
‘‘(A) the dollar amount in effect under 
subsection (b)(1)(A) for the taxable year, or 
‘‘(B) the sum of— 
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‘‘(i) the compensation includible in 
such individual’s gross income for the tax-
able year, plus 
‘‘(ii) the compensation includible in 
the gross income of such individual’s 
spouse for the taxable year reduced by— 
‘‘(I) the amount allowed as a de-
duction under subsection (a) to such 
spouse for such taxable year, and 
‘‘(II) the amount of any contribu-
tion on behalf of such spouse to a 
Roth IRA under section 30 for such 
taxable year. 
‘‘(2) INDIVIDUALS TO WHOM PARAGRAPH (1) 
APPLIES.—Paragraph (1) shall apply to any indi-
vidual if— 
‘‘(A) such individual files a joint return for 
the taxable year, and 
‘‘(B) the amount of compensation (if any) 
includible in such individual’s gross income for 
the taxable year is less than the compensation 
includible in the gross income of such individ-
ual’s spouse for the taxable year. 
‘‘(d) OTHER LIMITATIONS AND RESTRICTIONS.— 
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‘‘(2) MARRIED
INDIVIDUALS.—The maximum 
deduction under subsection (b) shall be computed 
separately for each individual, and this section shall 
be applied without regard to any community prop-
erty laws. 
‘‘(3) TIME
WHEN
CONTRIBUTIONS
DEEMED 
MADE.—For purposes of this section, a taxpayer 
shall be deemed to have made a contribution to an 
individual retirement plan during a year if the con-
tribution is made on account of such year and is 
made not later than April 15 of the following year. 
‘‘(4) REPORTS.—The Secretary shall prescribe 
regulations which prescribe the time and the manner 
in which reports to the Secretary and plan partici-
pants shall be made by the plan administrator of a 
qualified employer or government plan receiving 
qualified voluntary employee contributions. 
‘‘(5) EMPLOYER PAYMENTS.—For purposes of 
this title, any amount paid by an employer to an in-
dividual retirement plan shall be treated as payment 
of compensation to the employee (other than a self- 
employed individual who is an employee within the 
meaning of section 401(c)(1)) includible in his gross 
income in the taxable year for which the amount was 
contributed, whether or not a deduction for such 
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payment is allowable under this section to the em-
ployee. 
‘‘(6) EXCESS
CONTRIBUTIONS
TREATED
AS 
CONTRIBUTION
MADE
DURING
SUBSEQUENT
YEAR 
FOR WHICH THERE IS AN UNUSED LIMITATION.— 
‘‘(A) IN GENERAL.—If for the taxable year 
the maximum amount allowable as a deduction 
under this section for contributions to an indi-
vidual retirement plan exceeds the amount con-
tributed, then the taxpayer shall be treated as 
having made an additional contribution for the 
taxable year in an amount equal to the lesser 
of— 
‘‘(i) the amount of such excess, or 
‘‘(ii) the amount of the excess con-
tributions for such taxable year (deter-
mined under section 4973(b)(2) without 
regard to subparagraph (C) thereof). 
‘‘(B) AMOUNT
CONTRIBUTED.—For pur-
poses of this paragraph, the amount contrib-
uted— 
‘‘(i) shall be determined without re-
gard to this paragraph, and 
‘‘(ii) shall not include any rollover 
contribution. 
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‘‘(C) SPECIAL RULE WHERE EXCESS DE-
DUCTION WAS ALLOWED FOR CLOSED YEAR.— 
Proper reduction shall be made in the amount 
allowable as a deduction by reason of this para-
graph for any amount allowed as a deduction 
under this section for a prior taxable year for 
which the period for assessing deficiency has ex-
pired if the amount so allowed exceeds the 
amount which should have been allowed for 
such prior taxable year. 
‘‘(7) ELECTION
NOT
TO
DEDUCT
CONTRIBU-
TIONS.—For election not to deduct contributions to 
individual 
retirement 
plans, 
see 
section 
408(o)(2)(B)(ii). 
‘‘(g) LIMITATION ON DEDUCTION FOR ACTIVE PAR-
TICIPANTS IN CERTAIN PENSION PLANS.— 
‘‘(1) IN GENERAL.—If (for any part of any plan 
year ending with or within a taxable year) an indi-
vidual is an active participant, each of the dollar 
limitations contained in subsections (b)(1)(A) and 
(c)(1)(A) for such taxable year shall be reduced (but 
not below zero) by the amount determined under 
paragraph (2). 
‘‘(2) AMOUNT OF REDUCTION.— 
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‘‘(A) IN
GENERAL.—The amount deter-
mined under this paragraph with respect to any 
dollar limitation shall be the amount which 
bears the same ratio to such limitation as— 
‘‘(i) the excess of— 
‘‘(I) 
the 
taxpayer’s 
adjusted 
gross income for such taxable year, 
over 
‘‘(II) 
the 
applicable 
dollar 
amount, bears to 
‘‘(ii) $10,000 ($20,000 in the case of 
a joint return for a taxable year beginning 
after December 31, 2014). 
‘‘(B) NO REDUCTION BELOW $200 UNTIL 
COMPLETE
PHASE-OUT.—No dollar limitation 
shall be reduced below $200 under paragraph 
(1) unless (without regard to this subpara-
graph) such limitation is reduced to zero. 
‘‘(C) ROUNDING.—Any amount determined 
under this paragraph which is not a multiple of 
$10 shall be rounded to the next lowest $10. 
‘‘(3) ADJUSTED
GROSS
INCOME; APPLICABLE 
DOLLAR
AMOUNT.—For purposes of this sub-
section— 
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‘‘(A) ADJUSTED
GROSS
INCOME.—Ad-
justed gross income of any taxpayer shall be de-
termined without regard to the qualified IRA 
deduction. 
‘‘(B) APPLICABLE DOLLAR AMOUNT.—The 
term ‘applicable dollar amount’ means the fol-
lowing: 
‘‘(i) In the case of a taxpayer filing a 
joint return: 
‘‘For taxable years beginning 
in: 
The applicable dollar amount 
is: 
2007 ...............................................
$51,000
2008 ...............................................
$52,000
2009 ...............................................
$53,000
2010 ...............................................
$54,000
2011 ...............................................
$60,000
2012 ...............................................
$65,000
2013 ...............................................
$70,000
2014 ...............................................
$75,000
2015 and thereafter .......................
$80,000. 
‘‘(ii) In the case of any other taxpayer 
(other than a married individual filing a 
separate return): 
‘‘For taxable years beginning 
in: 
The applicable dollar amount 
is: 
2007 ...............................................
$31,000
2008 ...............................................
$32,000
2009 ...............................................
$33,000
2010 ...............................................
$34,000
2011 ...............................................
$40,000
2012 ...............................................
$45,000
2013 and thereafter .......................
$50,000. 
‘‘(iii) In the case of a married indi-
vidual filing a separate return, zero. 
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‘‘(4) SPECIAL RULE FOR MARRIED INDIVIDUALS 
FILING SEPARATELY AND LIVING APART.—A hus-
band and wife who— 
‘‘(A) file separate returns for any taxable 
year, and 
‘‘(B) live apart at all times during such 
taxable year, shall not be treated as married in-
dividuals for purposes of this subsection. 
‘‘(5) ACTIVE
PARTICIPANT.—For purposes of 
this subsection, the term ‘active participant’ means, 
with respect to any plan year, an individual— 
‘‘(A) who is an active participant in— 
‘‘(i) a plan described in section 401(a) 
which includes a trust exempt from tax, 
‘‘(ii) an annuity plan described in sec-
tion 403(a), 
‘‘(iii) a plan established for its em-
ployees by the United States, by a State or 
political subdivision thereof, or by an agen-
cy or instrumentality of any of the fore-
going, 
‘‘(iv) an annuity contract described in 
section 403(b), 
‘‘(v) a simplified employee pension 
(within the meaning of section 408(k)), or 
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‘‘(vi) any simple retirement account 
(within the meaning of section 408(p)), or 
‘‘(B) who makes deductible contributions 
to a trust described in section 501(c)(18). 
The determination of whether an individual is an ac-
tive participant shall be made without regard to 
whether or not such individual’s rights under a plan, 
trust, or contract are nonforfeitable. An eligible de-
ferred compensation plan (within the meaning of 
section 457(b) of the Internal Revenue Code of 
1986) shall not be treated as a plan described in 
subparagraph (A)(iii). 
‘‘(6) CERTAIN INDIVIDUALS NOT TREATED AS 
ACTIVE PARTICIPANTS.—For purposes of this sub-
section, any individual described in any of the fol-
lowing subparagraphs shall not be treated as an ac-
tive participant for any taxable year solely because 
of any participation so described: 
‘‘(A) MEMBERS
OF
RESERVE
COMPO-
NENTS.—Participation in a plan described in 
subparagraph (A)(iii) of paragraph (5) by rea-
son of service as a member of a reserve compo-
nent of the Armed Forces (as defined in section 
10101 of title 10, unless such individual has 
served in excess of 90 days on active duty 
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(other than active duty for training) during the 
year. 
‘‘(B) VOLUNTEER FIREFIGHTERS.—A vol-
unteer firefighter— 
‘‘(i) who is a participant in a plan de-
scribed in subparagraph (A)(iii) of para-
graph (5) based on his activity as a volun-
teer firefighter, and 
‘‘(ii) whose accrued benefit as of the 
beginning of the taxable year is not more 
than an annual benefit of $1,800 (when 
expressed as a single life annuity com-
mencing at age 65). 
‘‘(7) SPECIAL RULE FOR CERTAIN SPOUSES.— 
In the case of an individual who is an active partici-
pant at no time during any plan year ending with 
or within the taxable year but whose spouse is an 
active participant for any part of any such plan 
year— 
‘‘(A) the applicable dollar amount under 
paragraph (3)(B)(i) with respect to the tax-
payer shall be $150,000, and 
‘‘(B) the amount applicable under para-
graph (2)(A)(ii) shall be $10,000. 
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‘‘(h) CROSS REFERENCE.—For failure to provide re-
quired reports, see section 6652(g). 
‘‘SEC. 32. EFFECT OF REPEAL OF SPECIAL SAVINGS PROVI-
SIONS. 
‘‘(a) EDUCATION IRA’S.— 
‘‘(1) IN GENERAL.—An account that qualifies 
as an education IRA under the Internal Revenue 
Code of 1986 as in effect immediately before adop-
tion of the Simplified USA Tax Act shall be treated 
as a Roth IRA for purposes of this chapter (includ-
ing rules allowing for tax-free rollover). 
‘‘(2) NO NEW CONTRIBUTIONS.—Neither para-
graph (1) nor section 530 of the Internal Revenue 
Code of 1986 shall apply to an education IRA to 
which contributions are made after December 31, 
2006. 
‘‘(3) SPECIAL RULE.—For purposes of applying 
section 30 to an account that was an educational 
IRA, the designated beneficiary of such account 
shall be treated as described in a subclause of clause 
(vi) of section 30(d)(5). 
‘‘(b) MEDICAL SAVINGS ACCOUNTS.— 
‘‘(1) EQUIVALENT
OF
DEDUCTIBLE
IRA.—A 
medical savings account shall be treated as an indi-
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jlentini on PROD1PC65 with BILLS
vidual retirement plan other than a Roth IRA for 
purposes of this chapter and chapter 3. 
‘‘(2) SPECIAL ROLLOVER RULES.— 
‘‘(A) NO INCOME LIMIT.—The income lim-
its of section 30(c)(3)(B) shall not apply to the 
rollover of a medical savings account into a 
Roth IRA. 
‘‘(B) MEDICAL DISTRIBUTIONS.—For pur-
poses of applying section 30 to the amount of 
any medical savings account rolled over to a 
Roth IRA, subclause (iii) of section 30(d)(5) 
shall apply without regard to the limitation 
based on adjusted gross income. 
‘‘(3) MEDICAL
SAVINGS
ACCOUNT.—‘Medical 
savings account’ means an account established under 
section 220 of the Internal Revenue Code of 1986. 
‘‘(c) QUALIFIED STATE TUITION PROGRAMS.— 
‘‘(1) EDUCATION
SAVINGS
ACCOUNT
PRO-
GRAMS.—No account shall fail to qualify as a Roth 
IRA merely because in addition to the beneficiary of 
the account, there is a ‘designated beneficiary’ whose 
education expenses the beneficiary expects to pay or 
have paid with the proceeds of the account. The pay-
ment of such expenses with the proceeds of an ac-
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count shall be treated as a distribution from the ac-
count. 
‘‘(2) PREPAID TUITION CERTIFICATES.— 
‘‘(A) CONTRIBUTION
TO
ACCOUNTS.—An 
individual may contribute prepaid tuition cer-
tificates to a Roth IRA before January 1, 2010, 
without recognizing gross income on the con-
tribution of such certificates. For purposes of 
section 30, the amount contributed shall equal 
the cost of the certificates. 
‘‘(B) PURCHASE
OF
PREPAID
TUITION 
CERTIFICATES.—A Roth IRA account may pur-
chase prepaid tuition certificates without vio-
lating section 408. 
‘‘(C) PREPAID TUITION CERTIFICATES.— 
‘Prepaid tuition certificates’ means credits or 
certificates that entitle a designated beneficiary 
of such certificates to the waiver or payment of 
qualified higher education expenses of the des-
ignated beneficiary. 
‘‘(3) ROLLOVER OF ACCOUNTS.—An account to 
which section 529 of the Internal Revenue Code of 
1986 (before adoption of the Simplified USA Tax 
Act) shall be treated as a Roth IRA for purposes of 
rules relating to qualified rollovers (except that in 
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the case of any such rollover, any contributions 
made to the section 529 account after July 1, 2006, 
shall be treated as contributions to the Roth IRA in 
the year of the rollover for purposes of section 
30(c)(2)). 
‘‘(4) TRANSITION.— 
‘‘(A) TRANSITION
PERIOD.—Subsections 
(a) and (c) of section 529 of the Internal Rev-
enue Code of 1986 shall apply until January 1, 
2010. 
‘‘(B) TRANSITION.—The Secretary shall 
prescribe rules to facilitate use of the Roth IRA 
rules to exempt earnings on accounts and cer-
tificates previously exempted under section 529 
of the Internal Revenue Code of 1986. 
‘‘(5) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—For purposes of this subsection, the defi-
nition ‘qualified higher education expenses’ in sec-
tion 529(e)(3) of the Internal Revenue Code of 1986 
shall apply. 
‘‘SEC. 33. ANNUITIES, CERTAIN PROCEEDS OF ENDOWMENT 
AND LIFE INSURANCE CONTRACTS. 
‘‘(a) GENERAL RULE FOR ANNUITIES.—Except as 
otherwise provided in this chapter, gross income includes 
any amount received as an annuity (whether for a period 
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tract, the amount of such unrecovered in-
vestment (in excess of any amount speci-
fied in subsection (e)(5) which was not in-
cluded in gross income) shall be allowed as 
a deduction from adjusted gross income in 
determining taxable income of the annu-
itant for his last taxable year. 
‘‘(B) PAYMENTS TO OTHER PERSONS.—In 
the case of any contract which provides for pay-
ments meeting the requirements of subpara-
graphs (B) and (C) of subsection (c)(2), the de-
duction under subparagraph (A) shall be al-
lowed to the person entitled to such payments 
for the taxable year in which such payments are 
received. 
‘‘(c) DEFINITIONS.— 
‘‘(1) INVESTMENT
IN
THE
CONTRACT.—For 
purposes of subsection (b), the investment in the 
contract as of the annuity starting date is— 
‘‘(A) the aggregate amount of premiums or 
other consideration paid for the contract (in-
cluding any amounts earned on the contract 
which were included in gross income and rein-
vested in the contract), minus 
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‘‘(B) the aggregate amount received under 
the contract before such date, to the extent that 
such amount was excludable from gross income 
under this subtitle or prior income tax laws. 
‘‘(2) OTHER
TERMS
USED
IN
SUBSECTION 
(b).—Calculations under subsections (a) and (b) 
shall be made in accordance with regulations pre-
scribed by the Secretary, which regulations shall 
generally be consistent with the section 72 of the In-
ternal Revenue Code of 1986. 
‘‘(d) SPECIAL RULES FOR QUALIFIED EMPLOYER 
RETIREMENT PLANS.— 
‘‘(1) SIMPLIFIED METHOD OF TAXING ANNUITY 
PAYMENTS.— 
‘‘(A) IN
GENERAL.—In the case of any 
amount received as an annuity under a quali-
fied employer retirement plan— 
‘‘(i) subsection (b) shall not apply, 
and 
‘‘(ii) the investment in the contract 
shall be recovered as provided in this para-
graph. 
‘‘(B) METHOD
OF
RECOVERING
INVEST-
MENT IN CONTRACT.— 
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‘‘(i) 
IN
GENERAL.—Gross 
income 
shall not include so much of any monthly 
annuity payment under a qualified em-
ployer retirement plan as does not exceed 
the amount obtained by dividing— 
‘‘(I) the investment in the con-
tract (as of the annuity starting date), 
by 
‘‘(II) the number of anticipated 
payments determined under the table 
contained in clause (iii) (or, in the 
case of a contract to which subsection 
(c)(3)(B) applies, the number of 
monthly annuity payments under such 
contract). 
‘‘(ii) CERTAIN RULES MADE APPLICA-
BLE.—Rules similar to the rules of para-
graphs (2) and (3) of subsection (b) shall 
apply for purposes of this paragraph. 
‘‘(iii) NUMBER OF ANTICIPATED PAY-
MENTS.—If the annuity is payable over the 
life of a single individual, the number of 
anticipated payments shall be determined 
as follows: 
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‘‘If the age of the annuitant 
on the annuity starting 
date is: 
The number: 
Not more than 55 ..........................
360 
More than 55 but not more than 
60.
310 
More than 60 but not more than 
65.
260 
More than 65 but not more than 
70.
210 
More than 70 .................................
160 
‘‘(iv) NUMBER OF ANTICIPATED PAY-
MENTS WHERE MORE THAN ONE LIFE.—If 
the annuity is payable over the lives of 
more than 1 individual, the number of an-
ticipated payments shall be determined as 
follows: 
‘‘If the combined ages of the 
annuitants are: 
The number: 
Not more than 110 ........................
410 
More than 110 but not more than 
120.
360 
More than 120 but not more than 
130.
310 
More than 130 but not more than 
140.
260 
More than 140 ...............................
210 
‘‘(C) SPECIAL
RULE
WHERE
LUMP
SUM 
PAID
IN
CONNECTION
WITH
COMMENCEMENT 
OF ANNUITY PAYMENTS.—If, in connection with 
the commencement of annuity payments under 
any qualified employer retirement plan, the tax-
payer receives a lump sum payment— 
‘‘(i) such payment shall be taxable 
under subsection (e) as if received before 
the annuity starting date, and 
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‘‘(ii) the investment in the contract 
for purposes of this paragraph shall be de-
termined as if such payment had been so 
received. 
‘‘(D) EXCEPTION.—This paragraph shall 
not apply in any case where the primary annu-
itant has attained age 75 on the annuity start-
ing date unless there are fewer than 5 years of 
guaranteed payments under the annuity. 
‘‘(E) ADJUSTMENT WHERE ANNUITY PAY-
MENTS
NOT
ON
A
MONTHLY
BASIS.—In any 
case where the annuity payments are not made 
on a monthly basis, appropriate adjustments in 
the application of this paragraph shall be made 
to take into account the period on the basis of 
which such payments are made. 
‘‘(F) QUALIFIED EMPLOYER RETIREMENT 
PLAN.—For purposes of this paragraph, the 
term ‘qualified employer retirement plan’ means 
any plan or contract described in paragraph 
(1), (2), or (3) of section 4974(c). 
‘‘(2) TREATMENT
OF
EMPLOYEE
CONTRIBU-
TIONS
UNDER
DEFINED
CONTRIBUTION
PLANS.— 
For purposes of this section, employee contributions 
(and any income allocable thereto) under a defined 
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contribution plan may be treated as a separate con-
tract. 
‘‘(e) AMOUNTS NOT RECEIVED AS ANNUITIES.— 
‘‘(1) APPLICATION OF SUBSECTION.— 
‘‘(A) IN GENERAL.—This subsection shall 
apply to any amount which— 
‘‘(i) is received under an annuity, en-
dowment, or life insurance contract, and 
‘‘(ii) is not received as an annuity, if 
no provision of this subtitle (other than 
this subsection) applies with respect to 
such amount. 
‘‘(B) DIVIDENDS.—For purposes of this 
section, any amount received which is in the na-
ture of a dividend or similar distribution shall 
be treated as an amount not received as an an-
nuity. 
‘‘(2) GENERAL RULE.—Any amount to which 
this subsection applies— 
‘‘(A) if received on or after the annuity 
starting date, shall be included in gross income, 
or 
‘‘(B) if received before the annuity starting 
date— 
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‘‘(i) shall be included in gross income 
to the extent allocable to income on the 
contract, and 
‘‘(ii) shall not be included in gross in-
come to the extent allocable to the invest-
ment in the contract. 
‘‘(3) ALLOCATION
OF
AMOUNTS
TO
INCOME 
AND
INVESTMENT.—For purposes of paragraph 
(2)(B): 
‘‘(A) Any amount to which this subsection 
applies shall be treated as allocable to income 
on the contract to the extent that such amount 
does not exceed the excess (if any) of— 
‘‘(i) the cash value of the contract 
(determined without regard to any sur-
render charge) immediately before the 
amount is received, over 
‘‘(ii) the investment in the contract at 
such time. 
‘‘(B) Any amount to which this subsection 
applies shall be treated as allocable to invest-
ment in the contract to the extent that such 
amount is not allocated to income under sub-
paragraph (A). 
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‘‘(4) SPECIAL
RULES
FOR
APPLICATION
OF 
PARAGRAPH
(2)(b).—For purposes of paragraph 
(2)(B): 
‘‘(A) 
LOANS
TREATED
AS
DISTRIBU-
TIONS.—If, during any taxable year, an indi-
vidual— 
‘‘(i) receives (directly or indirectly) 
any amount as a loan under any contract 
to which this subsection applies, or 
‘‘(ii) assigns or pledges (or agrees to 
assign or pledge) any portion of the value 
of any such contract, such amount or por-
tion shall be treated as received under the 
contract as an amount not received as an 
annuity. The preceding sentence shall not 
apply for purposes of determining invest-
ment in the contract, except that the in-
vestment in the contract shall be increased 
by any amount included in gross income by 
reason of the amount treated as received 
under the preceding sentence. 
‘‘(B) TREATMENT
OF
TRANSFERS
WITH-
OUT ADEQUATE CONSIDERATION.— 
‘‘(i) IN
GENERAL.—If an individual 
who holds an annuity contract transfers it 
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without full and adequate consideration, 
such individual shall be treated as receiv-
ing an amount equal to the excess of— 
‘‘(I) the cash surrender value of 
such contract at the time of transfer, 
over 
‘‘(II) the investment in such con-
tract at such time, under the contract 
as an amount not received as an an-
nuity. 
‘‘(ii) 
EXCEPTION
FOR
CERTAIN 
TRANSFERS
BETWEEN
SPOUSES
OR 
FORMER
SPOUSES.—Clause (i) shall not 
apply to any transfer to which section 
77(c) (relating to transfers of property be-
tween spouses or incident to divorce) ap-
plies. 
‘‘(iii) ADJUSTMENT
TO
INVESTMENT 
IN CONTRACT OF TRANSFEREE.—If under 
clause (i) an amount is included in the 
gross income of the transferor of an annu-
ity contract, the investment in the contract 
of the transferee in such contract shall be 
increased by the amount so included. 
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‘‘(5) RETENTION OF EXISTING RULES IN CER-
TAIN CASES.—Paragraph (5) of section 72(e) of the 
Internal Revenue Code of 1986 shall apply to con-
tracts described in subparagraph (B) of such para-
graph to the extent provided therein. 
‘‘(6) INVESTMENT
IN
THE
CONTRACT.—For 
purposes of this subsection, the investment in the 
contract as of any date is— 
‘‘(A) the aggregate amount of premiums or 
other consideration paid for the contract before 
such date, minus 
‘‘(B) the aggregate amount received under 
the contract before such date, to the extent that 
such amount was excludable from gross income 
under this subtitle or prior income tax laws. 
‘‘(7) APPLICATION
OF
PARAGRAPH (2)(b) TO 
QUALIFIED PLANS.— 
‘‘(A) IN GENERAL.—Notwithstanding any 
other provision of this subsection, in the case of 
any amount received before the annuity starting 
date from a trust or contract described in para-
graph (5)(D), paragraph (2)(B) shall apply to 
such amounts. 
‘‘(B) 
ALLOCATION
OF
AMOUNT
RE-
CEIVED.—For purposes of paragraph (2)(B), 
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the amount allocated to the investment in the 
contract shall be the portion of the amount de-
scribed in subparagraph (A) which bears the 
same ratio to such amount as the investment in 
the contract bears to the account balance. The 
determination under the preceding sentence 
shall be made as of the time of the distribution 
or at such other time as the Secretary may pre-
scribe. 
‘‘(C) 
TREATMENT
OF
FORFEITABLE 
RIGHTS.—If an employee does not have a non-
forfeitable right to any amount under any trust 
or contract to which subparagraph (A) applies, 
such amount shall not be treated as part of the 
account balance. 
‘‘(D) INVESTMENT IN THE CONTRACT BE-
FORE 1987.—In the case of a plan which on 
May 5, 1986, permitted withdrawal of any em-
ployee contributions before separation from 
service, subparagraph (A) shall apply only to 
the extent that amounts received before the an-
nuity starting date (when increased by amounts 
previously received under the contract after De-
cember 31, 1986) exceed the investment in the 
contract as of December 31, 1986. 
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