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for the taxable year as exceeds the final
phaseout amount.’’
(b) PERCENTAGES AND AMOUNTS.—
(1) IN GENERAL.—Subsection (b) of section 32,
as amended by section 13202(b), is amended to read
as follows:
‘‘(b) PERCENTAGES AND AMOUNTS.—
‘‘(1) PERCENTAGES.—The credit percentage, the
initial phaseout percentage, and the final phaseout
percentage shall be determined as follows:
‘‘In the case of an eligible individual with:
The credit
percentage
is:
The initial
phaseout
percentage
is:
The final
phaseout
percentage
is:
1 qualifying child ..........................................................................................................
15.98
2 or more qualifying children ......................................................................................
21.06
‘‘(2) AMOUNTS.—The earned income amount, the
initial phaseout amount, and the final phaseout
amount shall be determined as follows:
‘‘In the case of an eligible individual with:
The earned
income
amount is:
The initial
phaseout
amount is:
The final
phaseout
amount is:
1 qualifying child ........................................................................................................
$6,340
$11,630
$14,850
2 or more qualifying children ....................................................................................
$8,910
$11,630
$17,750’’.
(2) INCREASE
IN
CREDIT
FOR
LOWER-INCOME
FAMILIES HAVING 2 MORE QUALIFYING CHILDREN.—
Subsection (d) of section 32 is amended to read as fol-
lows:
‘‘(d) INCREASE
IN CREDIT
FOR LOWER-INCOME
FAMILIES HAVING 2 OR MORE QUALIFYING CHILDREN.—
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‘‘(1) IN GENERAL.—If an eligible individual has
2 or more qualifying children, for purposes of apply-
ing paragraphs (1) and (2)(A) of subsection (a)—
‘‘(A) the amount of the taxpayer’s earned
income shall be treated as being equal to 10⁄9 of
such income (determined without regard to this
paragraph), and
‘‘(B) the earned income amount shall be
treated as being equal to 10⁄9 of such amount (de-
termined without regard to this paragraph).
‘‘(2) PHASEOUT OF BENEFIT.—If the applicable
income of the taxpayer for the taxable year exceeds
$14,000 ($17,000 in the case of a joint return), the
amount of each increase under paragraph (1) shall be
reduced (but not below zero) by an amount which
bears the same ratio to such increase (determined
without regard to this subparagraph) as such excess
bears to $4,000.
‘‘(3) APPLICABLE INCOME.—For purposes of this
subsection, the term ‘applicable income’ means ad-
justed gross income or, if greater, earned income.’’
(3) CONFORMING AMENDMENTS.—
(A) Subsection (j) of section 32 is amend-
ed—
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(i) by striking ‘‘subsection (b)(2)(A)’’
and inserting ‘‘subsection (b)(2) or (d)’’,
(ii) by striking ‘‘1994’’ and inserting
‘‘1996’’, and
(iii) by striking ‘‘1993’’ and inserting
‘‘1995’’.
(B) Subsection (e) of section 32 is amended
to read as follows:
‘‘(e) OTHER SPECIAL RULES—
‘‘(1) MARRIED INDIVIDUALS.—In the case of an
individual who is married (within the meaning of
section 7703), this section shall apply only if a joint
return is filed for the taxable year.
‘‘(2) TAXABLE YEAR MUST BE FULL TAXABLE
YEAR.—Except in the case of a taxable year closed by
reason of the death of an individual, no credit shall
be allowable under this section in the case of a taxable
year covering a period of less than 12 months.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
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SEC. 13204. RULES RELATING TO DENIAL OF EARNED IN-
COME CREDIT ON BASIS OF DISQUALIFIED IN-
COME.
(a) DEFINITION OF DISQUALIFIED INCOME.—Para-
graph (2) of section 32(i) (defining disqualified income) is
amended by striking ‘‘and’’ at the end of subparagraph
(B), by striking the period at the end of subparagraph (C)
and inserting ‘‘, and’’, and by adding at the end the fol-
lowing new subparagraph:
‘‘(D) the excess (if any) of—
‘‘(i) the aggregate income from all pas-
sive activities for the taxable year (deter-
mined without regard to any amount de-
scribed in a preceding subparagraph), over
‘‘(ii) the aggregate losses from all pas-
sive activities for the taxable year (as so de-
termined).
For purposes of subparagraph (D), the term
‘passive activity’ has the meaning given such
term by section 469.’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
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SEC. 13205. MODIFICATION OF ADJUSTED GROSS INCOME
DEFINITION FOR EARNED INCOME CREDIT.
(a) IN GENERAL.—Subsections (a)(2), (c)(1)(C),
(d), and (f)(2)(B) of section 32, as amended by the preced-
ing sections of this subtitle, are each amended by striking
‘‘adjusted gross income’’ each place it appears and insert-
ing ‘‘modified adjusted gross income’’.
(b) MODIFIED
ADJUSTED
GROSS
INCOME
DE-
FINED.—Section 32(c) (relating to definitions and special
rules) is amended by adding at the end the following new
paragraph:
‘‘(5) MODIFIED ADJUSTED GROSS INCOME.—
‘‘(A) IN GENERAL.—The term ‘modified ad-
justed gross income’ means adjusted gross in-
come—
‘‘(i) increased by the sum of the
amounts described in subparagraph (B),
and
‘‘(ii) determined without regard to—
‘‘(I) the amounts described in sub-
paragraph (C), or
‘‘(II) the deduction allowed under
section 172.
‘‘(B) NONTAXABLE INCOME TAKEN INTO AC-
COUNT.—Amounts described in this subpara-
graph are—
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‘‘(i) social security benefits (as defined
in section 86(d)) received by the taxpayer
during the taxable year to the extent not in-
cluded in gross income,
‘‘(ii) amounts which—
‘‘(I) are received during the tax-
able year by (or on behalf of) a spouse
pursuant to a divorce or separation in-
strument 
(as 
defined 
in 
section
71(b)(2)), and
‘‘(II) under the terms of the in-
strument are fixed as payable for the
support of the children of the payor
spouse (as determined under section
71(c)),
but only to the extent such amounts exceed
$6,000,
‘‘(iii) interest received or accrued dur-
ing the taxable year which is exempt from
tax imposed by this chapter, and
‘‘(iv) amounts received as a pension or
annuity, and any distributions or payments
received from an individual retirement
plan, by the taxpayer during the taxable
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year to the extent not included in gross in-
come.
Clause (iv) shall not include any amount which
is not includible in gross income by reason of
section 402(c), 403(a)(4), 403(b)(8), 408(d) (3),
(4), or (5), or 457(e)(10).
‘‘(C) CERTAIN
AMOUNTS
DISREGARDED.—
an amount is described in this subparagraph if
it is—
‘‘(i) the amount of losses form sales or
exchanges of capital assets in excess of gains
from such sales or exchanges to the extent
such amount does not exceed the amount
under section 1211(b)(1),
‘‘(ii) the net loss from the carrying on
of trades or businesses, computed separately
with respect to—
‘‘(I) trades or businesses (other
than farming) conducted as sole pro-
prietorships,
‘‘(II) trades or businesses of farm-
ing conducted as sole proprietorships,
and
‘‘(III) other trades or business,
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‘‘(iii) the net loss from estates and
trusts, and
‘‘(iv) the excess (if any) of
amounts 
described 
in 
subsection
(i)(2)(C)(ii) over the amounts described
in subsection (i)(2)(C)(i) (relating to
nonbusiness rents and royalties).
For purposes of clause (ii), there shall not be
taken into account items which are attributable
to a trade or business which consists of the per-
formance of services by the taxpayer as an em-
ployee.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
SEC. 13206. PROVISIONS TO IMPROVE TAX COMPLIANCE.
(a) INCREASE IN PENALTIES FOR RETURN PRE-
PARERS.—
(1) UNDERSTATEMENT PENALTY.—Section 6694
(relating to understatement of income tax liability by
income tax return preparer) is amended—
(A) by striking ‘‘$250’’ in subsection (a)
and inserting ‘‘$500’’, and
(B) by striking ‘‘$1,000’’ in subsection (b)
and inserting ‘‘$2,000’’.
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(2) OTHER
ASSESSABLE
PENALTIES.—Section
6695 (relating to other assessable penalties) is amend-
ed—
(A) by striking ‘‘$50’’ and ‘‘$25,000’’ in
subsections (a), (b), (c), (d), and (e) and insert-
ing ‘‘$100’’ and ‘‘$50,000’’, respectively, and
(B) by striking ‘‘$500’’ in subsection (f)
and inserting ‘‘$1,000’’.
(b) AIDING
AND
ABETTING
PENALTY.—Section
6701(b) (relating to amount of penalty) is amended—
(1) by striking ‘‘$1,000’’ in paragraph (1) and
inserting ‘‘$2,000’’, and
(2) by striking ‘‘10,000’’ in paragraph (2) and
inserting ‘‘20,000’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to penalties with respect to taxable
years beginning after December 31, 1995.
Attest:
Secretary.
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