I
105TH CONGRESS
2D SESSION
H. R. 4700
To amend the Internal Revenue Code of 1986 to restructure and replace
the income tax system of the United States to meet national priorities,
and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
OCTOBER 5, 1998
Mr. ENGLISH of Pennsylvania 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 restructure
and replace the income tax system of the United States
to meet national priorities, 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. SHORT TITLE; AMENDMENT OF 1986 CODE;
TABLE OF CONTENTS.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Simplified USA Tax Act of 1998’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act a reference
is made to the Code or to a section or provision of the
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Code, the reference shall be considered to be made to the
Internal Revenue Code of 1986 or to a section or provision
thereof.
(c) TABLE OF CONTENTS.—
Sec. 1. Short title; amendment of 1986 Code; table of contents.
TITLE I—FINDINGS; NEED TO REPLACE THE INCOME TAX
Sec. 101. Replacing the income tax of the United States.
TITLE II—SIMPLIFIED USA TAX FOR INDIVIDUALS
Sec. 201. Simplified USA Tax for individuals.
Sec. 202. Reorganization of the Code.
TITLE III—SIMPLIFIED USA TAX FOR BUSINESSES
Sec. 301. Repeal of present corporate income tax; new tax paid by corporations
and other businesses.
Sec. 302. Repeal of chapter 6.
TITLE IV—DEFERRED COMPENSATION PLANS
Sec. 401. Provisions saved.
Sec. 402. Clerical Amendments.
Sec. 403. Clerical Amendments.
TITLE V—REPEAL OF ESTATE AND GIFT TAXES
Sec. 501. Repeal of gratuitous transfer taxes.
Sec. 502. Effective Date.
TITLE VI—TECHNICAL AND ADMINISTRATIVE CHANGES;
EFFECTIVE DATES
Sec. 601. USA Tax Code.
Sec. 602. Revisions to the Code.
Sec. 603. Application of subtitle F.
Sec. 604. Clerical amendment.
TITLE I—FINDINGS; NEED TO
REPLACE THE INCOME TAX
SEC. 101. REPLACING THE INCOME TAX OF THE UNITED
STATES.
(a) FINDINGS.—The Congress finds that—
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(1) the current Tax Code is irreparably flawed
and must be replaced;
(2) to enhance the liberty and protect the pri-
vacy of individuals, the Tax Code must be made sim-
pler and nonintrusive, and it must be applied
evenhandedly to all;
(3) to be fair and to provide for the prosperity
of current and future generation, the Tax Code must
give all individuals at all income levels an oppor-
tunity to save, invest and raise their standard of liv-
ing and that of their children; and
(4) future economic growth requires a tax sys-
tem that facilitates successful competition in the
global marketplace.
(b) MAIN FEATURES OF SIMPLIFIED USA TAX SYS-
TEM.—
(1) REPLACEMENT
OF
OLD
TAX
SYSTEM.—
Chapter 1 of subtitle A (related to income taxes) of
the Code is repealed and replaced for years begin-
ning after 1998.
(2) ESTATE AND GIFT TAX REPEALED.
(3) NEW TAX SYSTEM.—The Simplified USA
Tax consists of—
(A) a simplified tax collected from individ-
uals, that for years after 1998 replaces the in-
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come tax imposed on individuals by section 1 of
the Code, and
(B) a simplified tax collected from corpora-
tions and other businesses, that for years after
1998 replaces the income tax imposed on cor-
porations by section 11 of the Code.
(3) SIMPLIFIED USA TAX ON GROSS PROFITS.—
Corporations and other businesses pay tax on their
annual gross profits from business conducted in the
United States, except that—
(A) export revenues are excluded, and
(B) imports are taxed.
(4) SIMPLIFIED USA TAX ON INCOME.—Individ-
uals pay tax on their annual income from wages,
dividends, interest, and other financial income (in-
cluding sales of property), except that—
(A) investment earnings on previously
taxed income that is placed in a Roth IRA is
exempt from further taxation,
(B) a portion of each family’s income is ex-
empt from tax, and
(C) deductions are allowed for—
(i) education costs,
(ii) religious, charitable, and other
philanthropic donations,
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(iii) home mortgage interest pay-
ments, and
(iv) contributions to qualified IRAs.
(5) CREDIT FOR FICA PAYROLL TAXES PAID.—
The amount of tax due is reduced by the payroll tax
that is—
(A) in the case of an employee, withheld
from wages, or
(B) in the case of a corporation or other
business, paid by the employer.
(c) CONCEPTS AND STRUCTURE OF NEW TAX SYS-
TEM.—
(1) GUIDING PRINCIPLES OF THE SIMPLIFIED
USA
TAX
SYSTEM.—The Simplified USA Tax is
based on the following principles:
(A) National wealth and well-being depend
on the work, skill, and savings and investment
of people.
(B) Businesses are people and their capital
working together.
(C) Capital makes people more productive.
(D) Everyone benefits from a growing
stock of national savings which in turn allows
for a growing stock of physical and human cap-
ital.
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(E) Under the Simplified USA Tax, the
deferral of taxation on investments in human
capital represents an investment by the Federal
government in the nation’s capital stock and
the Federal government shares in the return on
its investment in the form of higher economic
output and revenues in the future.
(2) SINGLE TAX IN 2 PARTS.—The Simplified
USA Tax is composed of a business tax and an indi-
vidual tax which are 2 parts of a single tax system
that subjects all income produced and received to
taxation once and only once. The 2 parts are as fol-
lows:
(A) BUSINESS TAX AT THE SOURCE OF IN-
COME.—Tax is paid by corporations and other
businesses which produce and sell goods and
services that are—
(i) the source of nearly all the gross
domestic product of the United States, and
(ii) the ultimate source of income re-
ceived by individuals.
(B) INDIVIDUAL
TAX
ON
INCOME
RE-
CEIVED.—Tax is paid by individuals when they
receive wages and salaries as compensation for
gross domestic product created by their work.
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(3) SAVING AND INVESTMENT.—The Simplified
USA Tax allows people to save and businesses to in-
vest as follows:
(A) FAIR OPPORTUNITY FOR PEOPLE TO
SAVE.—
(i) OPTIONAL ELIMINATION OF DOU-
BLE TAXATION.—When an individual earns
income and is taxed on that income, the
individual can save that income in a Roth
IRA and not pay income taxes on the in-
vestment earnings.
(ii) DEDUCTIBLE
AND
EXCLUDABLE
SAVINGS.—The Simplified USA Tax con-
tinues provisions of present law that
allow—
(I) lower income individuals and
certain other to make deductible con-
tributions to individual retirement ac-
counts, and
(II) encourage employer spon-
sored savings and retirement plans
that defer taxation of income through
use of 401(k) plans and other quali-
fied retirement plans.
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(B) FAIR OPPORTUNITY FOR BUSINESSES
TO INVEST.—
(i) NO PREPAYMENT OF TAX.—When
a 
business 
invests 
in 
plant 
and
equipment—
(I) a deduction is allowed for the
cost, and
(II) tax is deferred.
(ii) TAX ON EARNINGS AND RECOVERY
OF COST.—When recovered out of business
revenues, both the cost of the investment
and the earnings on the investment are in-
cluded in gross profit subject to tax.
(iii) EXPENSING.—The deduction for
investment is the equivalent of allowing the
cost of plant and equipment to be expensed
instead of depreciated.
(4) FAIR OPPORTUNITY TO COMPETE IN THE
GLOBAL MARKETPLACE.—The Simplified USA Tax
serves the strategic interests of the United States in
international markets as follows:
(A) BORDER ADJUSTABLE TAX.—
(i) 
AMERICAN-MADE
EXPORTS.—
Goods and services produced in the United
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States can be sold into world markets free
of tax.
(ii) FOREIGN-MADE IMPORTS.—Goods
and services imported into the United
States bear a fair and proportionate share
of the tax burden in the United States.
(iii) LEVELING THE INTERNATIONAL
PLAYING FIELD.—Border adjustments for
exports and imports are consistent with
international standards and practice.
(5) A SIMPLE AND UNDERSTANDABLE TAX—
The Simplified USA Tax for individuals—
(A) is written in a simple, understandable
form,
(B) contains only a few exemptions, deduc-
tions, and credits, and can be reported on a tax
return only a small fraction the size of Form
1040.
(6) A NONINTRUSIVE, EVENHANDED TAX.—
(A) TAXPAYERS ARE IN CONTROL.—When
the rules are few and clear, taxpayers can cal-
culate their own tax correctly and file their own
returns without fear of mistake or of getting
caught up in an argument with the IRS.
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(B) LIMITED ROLE FOR IRS.—When the
rules are few and clear, the IRS does not have
the broad interpretive power that puts tax-
payers at risk of being treated unfairly and un-
evenly.
(C) 
RESTORING
VOLUNTARY
COMPLI-
ANCE.—When the rules are few and clear, the
IRS can concentrate on helping taxpayers vol-
untarily pay their correct share of tax revenues
for public use and benefit under a tax system
that is understood and respected.
(7) MAINTAINING TAX PROGRESSIVITY FOR IN-
DIVIDUALS.—
(A) GRADUATED TAX.—Like the tax im-
posed by section 1 of the current Code, the
Simplified USA Tax for individuals is a grad-
uated tax.
(B) FAMILY
LIVING
ALLOWANCE.—The
Simplified USA Tax recognizes that every fami-
ly’s budget includes necessities. The Simplified
USA Tax provides a family living allowance
that exempts from taxation the first dollars
earned and spent to maintain a basic standard
of living.
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(8) BUSINESSES AND INDIVIDUAL SHARE THE
TAX BURDEN.—
(A) BUSINESS
PORTION
OF
TAX
BUR-
DEN.—Corporations and other businesses pay
about the same portion of the total tax as
under the current Code.
(B) INDIVIDUAL
PORTION
OF
TAX
BUR-
DEN.—Individuals pay about the same portion
of the total tax as under the current Code.
(9) EMPHASIZING
PERSONAL
INDEPENDENCE
AND RESPONSIBILITY.—
(A) REINFORCING A CULTURE OF WORK
AND THRIFT.—Instead of being solely a calcula-
tion of how much they must pay to the govern-
ment, the Simplified USA Tax converts the in-
come tax into an annual calculation of how
much people produce and contribute to the
economy.
(B) GREATER CONTROL AND RESPONSIBIL-
ITY.—Because people are not double taxed on
their saving, they have—
(i) more control over their own income
and taxes,
(ii) a greater ability to plan and pro-
vide for their own future, and
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(iii) a fair opportunity to do so.
(10) MORE OPPORTUNITY FOR WAGE EARNERS
AT LOWER INCOME LEVELS.—
(A) REFUNDABLE CREDIT FOR EMPLOYEE
PAYROLL TAX.—The amount of the payroll tax
paid or withheld under the Code from an em-
ployee’s wages (and paid into the Social Secu-
rity and Hospital Insurance Trust Funds) is—
(i) credited against the employee’s in-
come tax, and
(ii) refunded to the employee to the
extent in excess of the employee’s income
tax.
(B) NO EFFECT ON TRUST FUND OR BEN-
EFITS.—The income tax credit allowed for pay-
roll taxes deposited in the Social Security Trust
Fund does not—
(i) reduce the amount in such fund, or
(ii) reduce the payment of any per-
son’s benefits from the fund.
TITLE II—SIMPLIFIED USA TAX
FOR INDIVIDUALS
SEC. 201. SIMPLIFIED USA TAX FOR INDIVIDUALS.
(a) IN GENERAL.—Chapter 1 of the Code is amended
to read as follows:
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‘‘(b) TAXABLE INCOME.—‘Taxable income’ means
adjusted gross income, reduced by—
‘‘(1) the personal and dependency deduction,
‘‘(2) the Family Living Allowance, and
‘‘(3) the USA deductions, including—
‘‘(A) the homeowner deduction,
‘‘(B) the education deduction, and
‘‘(C) the philanthropic transfer deduction.
‘‘(c) ADJUSTED GROSS INCOME.—‘Adjusted gross in-
come’ means gross income, reduced by—
‘‘(1) the alimony and child support deductions,
and
‘‘(2) the qualified IRA deduction.
‘‘(d) NAME.—The tax imposed by this chapter shall
be known as the ‘Simplified USA Tax for Individuals’.
‘‘SEC. 2. PERSONS LIABLE FOR THE SIMPLIFIED USA TAX
FOR INDIVIDUALS.
‘‘(a) INDIVIDUALS ONLY.—The Simplified USA Tax
for Individuals shall apply only to individuals.
‘‘(b) CITIZENS AND RESIDENT ALIENS.—The Sim-
plified USA Tax for Individuals shall apply to all citizens
of the United States and to all resident aliens of the
United States. Except as specifically provided in this chap-
ter, the Simplified USA Tax for Individuals shall not
apply to nonresident aliens.
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‘‘(c) NONRESIDENT ALIENS.—For rules applicable to
the compensation income of nonresident aliens, see sub-
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)—
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‘‘(A) the cost of health, disability, life or
other similar insurance paid by an employer if
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 defined in section 171) constituting—
‘‘(A) compensation for use of capital, in-
cluding interest, or
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‘‘(B) shares of profits (including divi-
dends).
‘‘(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 medi-
cal expenses incurred and not paid or treated as
paid with amounts otherwise excluded from in-
come.
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‘‘(b) DEFINITIONS.—For purposes of subsection (a)
and section 4—
‘‘(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 bene-
fit. 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—
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‘‘(i) the amount of the annuity under
the Railroad Retirement Act of 1974 equal
to the amount of the benefit to which the
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
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are issued and are not deposited until the
month for which they are issued, they will be
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
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a substantial risk of forfeiture, whichever oc-
curs earlier, over
‘‘(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
gospel—
‘‘(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 prohibit-
ing 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 individ-
ual 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
income 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. PERSONAL AND DEPENDENCY DEDUCTION.
‘‘(a) AMOUNT OF EXEMPTION.—The personal and
dependency deduction for an individual shall equal the
number of exemptions multiplied by $2,700.
‘‘(b) NUMBER OF EXEMPTIONS.—
‘‘(1) TAXPAYER.—One exemption shall be al-
lowed for the taxpayer unless the taxpayer files a
joint return with a spouse, in which case 1 exemp-
tion shall be allowed for the husband and 1 for the
wife.
‘‘(2) ELIGIBLE
DEPENDENT.—An exemption
shall be allowed for each eligible dependent.
‘‘(c) DEPENDENT.—
‘‘(1) DEFINITION.—‘Dependent’ means any of
the following individuals over half of whose support,
for the calendar year was received from the taxpayer
or is treated as received from the taxpayer:
‘‘(A) A son or daughter of the taxpayer, or
a descendant of either.
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‘‘(B) A stepson, stepdaughter, stepfather,
or stepmother of the taxpayer.
‘‘(C) A brother, sister, stepbrother, or
stepsister of the taxpayer.
‘‘(D) The father or mother of the taxpayer,
or an ancestor of either.
‘‘(E) A son or daughter of a brother or sis-
ter of the taxpayer.
‘‘(F) A brother or sister of the mother or
father of the taxpayer.
‘‘(G) A son-in-law, daughter-in-law, father-
in-law, mother-in-law, brother-in-law, or sister-
in-law of the taxpayer.
‘‘(H) An individual (other than an individ-
ual who at any time during the taxable year
was the spouse, determined without regard to
section 7703, of a taxpayer) who, for the tax-
able year of the taxpayer, has as his principal
place of abode the home of the taxpayer and is
a member of the taxpayer’s household.
‘‘(2) RULES RELATING TO THE GENERAL DEFI-
NITION.—The Secretary shall prescribe rules similar
to the rules under section 152 of the Internal Reve-
nue Code of 1986 that shall apply to the general
definition of ‘dependent’, including definitional rules,
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rules relating to multiple support agreements, and
support tests in cases of children of divorced par-
ents.
‘‘(d) ELIGIBLE DEPENDENT.—
‘‘(1) IN GENERAL.—‘Eligible dependent’ means
a dependent—
‘‘(A) whose gross income for the calendar
year in which the taxable year of the taxpayer
begins is less than the exemption amount, or
‘‘(B) who is a child of the taxpayer and
who—
‘‘(i) has not attained the age of 19 at
the close of the calendar year in which the
taxable year of the taxpayer begins, or
‘‘(ii) is a student who has not attained
the age of 24 at the close of such calendar
year.
‘‘(2) EXCLUSIONS.—A dependent who files a
joint return with a spouse for the calendar year is
not an eligible dependent.
‘‘(3) RULES RELATING TO DEFINITIONS.—The
Secretary shall prescribe rules similar to those in-
cluded in or applicable under the Internal Revenue
Code of 1986 relating to this subsection, including
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‘‘SEC. 8. USA DEDUCTIONS.
‘‘In computing taxable income, an individual shall be
entitled to the following deductions:
‘‘(1) The homeowner deduction described in
section 9.
‘‘(2) The education deduction described in sec-
tion 10.
‘‘(3) The philanthropic transfer deduction de-
scribed in section 11.
‘‘SEC. 9. 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—
‘‘(A) was incurred in acquiring, construct-
ing, or substantially improving the qualified res-
idence, 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.
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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-
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. 10. EDUCATION DEDUCTION.
‘‘(a) IN GENERAL.—The education deduction shall
equal the sum of the qualified educational expenses for
each eligible student.
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‘‘(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,
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,
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1998), and which is eligible to participate
in a program under title IV of such Act.
‘‘(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
which an exemption is allowed in computing the
dependency deduction under section 6,
‘‘(B) the taxpayer’s spouse if a joint return
is filed, and
‘‘(C) any dependent of the taxpayer for
whom the taxpayer is allowed an exemption in
computing the dependency deduction under sec-
tion 6.
‘‘(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
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be adjusted for inflation beginning with calendar year
1999 in accordance with section 23.
‘‘SEC. 11. 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—
‘‘(A) 30 percent of the taxpayer’s adjusted
gross income, or
‘‘(B) the excess, if any, of 50 percent of
the taxpayer’s adjusted gross income over the
amount of charitable contributions to regular
charities.
‘‘(2) CARRYOVER.—If the amount of charitable
contributions made in a taxable year exceeds the
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amount which can be deducted in such year, the ex-
cess shall be carried over for a period of up to 5
years in accordance with rules to be prescribed by
the Secretary.
‘‘(3) REGULAR CHARITY.—For purposes of this
subsection, ‘regular charity’ means an organization
described in section 101, that is not a private foun-
dation (other than a private operating foundation)
(as such terms are defined in section 102).
‘‘(c) CHARITABLE CONTRIBUTION.—‘Charitable con-
tribution’ means a contribution or gift to or for the use
of a governmental or charitable recipient (as defined in
section 101).
‘‘(d) CONTRIBUTIONS OF PROPERTY.—
‘‘(1) GENERAL RULE.—In the case of a chari-
table contribution of property, the amount of the
contribution shall equal the lesser of the fair market
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,
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‘‘(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 market 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
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
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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,
‘‘(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. 13. LIMITATION ON DEDUCTIONS.
‘‘(a) IN GENERAL.—A taxpayer’s deductions shall not
reduce the taxpayer’s taxable income below zero. Except
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as provided in section 11(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 personal and dependency deduction,
‘‘(3) the Family Living Allowance,
‘‘(4) the USA deductions, and
‘‘(5) 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.
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.
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‘‘(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 1999, 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 23.
‘‘(f) 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-
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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
parent’s taxable income if such income included
the net unearned income of all of the eligible
parent’s children to which this section applies,
over
‘‘(B) the tax actually determined under the
rate schedules without regard to this section.
‘‘(2) CHILD’S SHARE.—A child’s share of the
allocable parental tax is equal to the amount that
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bears the same ratio to the total allocable parental
tax as the child’s net unearned income bears to the
aggregate net unearned income of all children to
whom this section applies for whom the eligible par-
ent is the eligible parent.
‘‘(c) ELIGIBLE PARENT.—‘Eligible parent’ means—
‘‘(1) both parents of the child if the parents file
a joint return,
‘‘(2) the surviving parent of a child if the child
has only 1 surviving parent,
‘‘(3) the custodial parent if the child’s parents
are not married, or
‘‘(4) the parent with the greater taxable income
if the parents are married and filing separate re-
turns.
‘‘(d) NET UNEARNED INCOME.—‘Net unearned in-
come’ means the excess, if any, of—
‘‘(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) an amount equal to the Family Liv-
ing Allowance for a dependent child.
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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 an exemption for the taxable year
for purposes of computing the dependency
deduction under section 6 (or would be so
entitled but for the release of a claim to
such exemption by the custodial parent),
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‘‘(ii) any other person who is a de-
pendent of the taxpayer, if the taxpayer is
entitled to claim such person as an exemp-
tion in determining the personal depend-
ency deduction for 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 personal
dependency deduction 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 individ-
ual.
‘‘(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;
‘‘(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;
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‘‘(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
household—
‘‘(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
6(c)(1) or
‘‘(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
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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 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.
‘‘(2) The payroll tax credit under section 21.
‘‘(3) The taxes-paid tax credit under section 22.
‘‘(b) REFUNDABLE CREDITS.—If a taxpayer’s USA
tax credits (other than the foreign tax credit) for a taxable
year exceed the taxpayer’s tax liability for the taxable year
(after application of the foreign tax credit but before appli-
cation of the other USA tax credits), the taxpayer shall
be entitled to a refund for such excess. The taxpayer may
elect in lieu of a refund to apply such excess as a tax paid
for the following taxable year.
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‘‘SEC. 21. 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.
‘‘(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
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‘‘(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
retirement tax for which a taxpayer is entitled to a refund
because of overpayment of tax on the applicable wage
base.
‘‘SEC. 22. 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.
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‘‘(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. 23. INDEXING FOR INFLATION.
‘‘(a) PUBLICATION OF TABLES AND NUMBERS.—Not
later than December 15 of 1998, and each subsequent cal-
endar year, the Secretary shall prescribe tables and dollar
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
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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
‘‘(B) the CPI for the calendar year 1997.
‘‘(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.
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‘‘(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 1998
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
‘‘(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.
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‘‘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 individ-
ual (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.
‘‘(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
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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 individ-
ual 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
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
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‘‘(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
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
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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
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.
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‘‘(4) 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.
‘‘(5) QUALIFIED SPECIAL PURPOSE DISTRIBU-
TION.—‘Qualified 
special 
purpose 
distribution’
means—
‘‘(i) DISTRIBUTIONS UPON DEATH.—
Distributions made to a beneficiary (or to
the estate of the individual) on or after the
death of the individual.
‘‘(ii) DISTRIBUTIONS UPON DISABIL-
ITY.—Distributions attributable to the in-
dividual’s being disabled.
‘‘(iii) DISTRIBUTIONS TO PAY MEDI-
CAL
EXPENSES.—Distributions made to
the individual for amounts paid during the
year for medical care, but only to the ex-
tent that the amounts paid for medical
care exceed 7.5% of the adjusted gross in-
come of the taxpayer. (determined without
regard to whether the employee itemizes
deductions for such taxable year).
‘‘(iv) QDROS.—Any distribution to
an alternate payee pursuant to a qualified
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domestic relations order (within the mean-
ing of section 414(p)(1)).
‘‘(v) DISTRIBUTIONS TO UNEMPLOYED
INDIVIDUALS
FOR
HEALTH
INSURANCE
PREMIUMS.—Distributions 
to 
an
individual—
‘‘(I) if such individual has re-
ceived unemployment compensation
for 12 consecutive weeks under any
Federal or State unemployment com-
pensation law by reason of such sepa-
ration (or in the case of a self-em-
ployed individual, to the extent pro-
vided in regulations, if the individual
would have received unemployment
compensation but for the fact the in-
dividual was self-employed),
‘‘(II) if such distributions are
made during any taxable year during
which such unemployment compensa-
tion is paid or the succeeding taxable
year,
‘‘(III) to the extent such distribu-
tions do not exceed the amount paid
during the taxable year for insurance
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for the diagnosis, cure, mitigation,
treatment, or prevention of disease, or
for the purpose of affecting any struc-
ture or function of the body (or for
transportation primarily for and es-
sential to such medical care) (includ-
ing amounts paid as premiums under
part B of title XVIII of the Social Se-
curity Act, relating to supplementary
medical insurance for the aged) or for
any qualified long-term care insurance
contract 
(as 
defined 
in 
section
7702B(b)) with respect to the individ-
ual 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.
‘‘(v) DISTRIBUTIONS TO PAY HIGHER
EDUCATION
EXPENSES.—Distributions to
the extent such distributions do not exceed
the qualified higher education expenses (as
defined in section 10(a)(2)) of—
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‘‘(I) the taxpayer,
‘‘(II) the taxpayer’s spouse, or
‘‘(III) any child or grandchild of
the taxpayer or the taxpayer’s spouse.
‘‘(vi) 
DISTRIBUTIONS
FOR
FIRST
HOME
PURCHASES.—Distributions which
are qualified first-time homebuyer distribu-
tions (as defined in paragraph (6)).
‘‘(6) 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-
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
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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
paragraph—
‘‘(i) 
FIRST-TIME
HOMEBUYER.—
‘First-time homebuyer’ means any individ-
ual if such individual (and if married, such
individual’s spouse) had no present owner-
ship interest in a principal residence dur-
ing the 2-year period ending on the date of
acquisition of the principal residence to
which this paragraph applies, and
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‘‘(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-
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.
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‘‘(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 EN-
TITY.—
‘‘(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,
‘‘(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
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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-
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
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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-
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
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‘‘(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—
‘‘(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—
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‘‘(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 individ-
ual 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.—
‘‘(1) BENEFICIARY
MUST
BE
UNDER
AGE
701⁄2.—No deduction shall be allowed under this sec-
tion with respect to any qualified retirement con-
tribution for the benefit of an individual if such indi-
vidual has attained age 701⁄2 before the close of such
individual’s taxable year for which the contribution
was made.
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‘‘(2) RECONTRIBUTED
AMOUNTS.—No deduc-
tion shall be allowed under this section with respect
to a rollover contribution described in section 402(c),
403(a)(4), 403(b)(8), or 408(d)(3).
‘‘(3) AMOUNTS CONTRIBUTED UNDER ENDOW-
MENT
CONTRACT.—In the case of an endowment
contract described in section 408(b), no deduction
shall be allowed under this section for that portion
of the amounts paid under the contract for the tax-
able year which is properly allocable, under regula-
tions prescribed by the Secretary, to the cost of life
insurance.
‘‘(4) DENIAL
OF
DEDUCTION
FOR
AMOUNT
CONTRIBUTED
TO
INHERITED
ANNUITIES
OR
AC-
COUNTS.—No deduction shall be allowed under this
section with respect to any amount paid to an inher-
ited individual retirement account or individual re-
tirement annuity (within the meaning of section
408(d)(3)(C)(ii)).
‘‘(e) QUALIFIED RETIREMENT CONTRIBUTION.—For
purposes of this section, the term ‘qualified retirement
contribution’ means—
‘‘(1) any amount paid in cash for the taxable
year by or on behalf of an individual to an individual
retirement plan for such individual’s benefit, and
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‘‘(2) any amount contributed on behalf of any
individual to a plan described in section 501(c)(18)
of the Internal Revenue Code of 1986.
‘‘(f) OTHER DEFINITIONS AND SPECIAL RULES.—
‘‘(1) COMPENSATION.—For purposes of this
section, the term ‘compensation’ includes earned in-
come (as defined in section 401(c)(2)). The term
‘compensation’ does not include any amount received
as a pension or annuity and does not include any
amount received as deferred compensation. The term
‘compensation’ shall include any alimony, child sup-
port and separate maintenance payments includible
in the individual’s gross income with respect to a di-
vorce or separation instrument. For purposes of this
paragraph, section 401(c)(2) shall be applied as if
the term trade or business for purposes of section
1402 included service described in subsection (c)(6).
‘‘(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
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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
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-
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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
contributed—
‘‘(i) shall be determined without re-
gard to this paragraph, and
‘‘(ii) shall not include any rollover
contribution.
‘‘(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