‘‘(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
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
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
‘‘(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.—
‘‘(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
‘‘(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-
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)),
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
‘‘(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
(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.
‘‘(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—
‘‘(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-
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,
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
‘‘(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—
‘‘(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 
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, 
‘‘(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
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,
‘‘(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.
‘‘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.—
‘‘(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.
‘‘(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
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 
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) $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
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
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
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;
‘‘(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
‘‘(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-
eign tax credit) for a taxable year exceed the taxpayer’s 
tax liability for the taxable year (after application of the 
family tax credit and the foreign tax credit but before ap-
plication 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. 
‘‘SEC. 21. FAMILY TAX CREDIT. 
‘‘(a) IN GENERAL.—The taxpayer shall be allowed a 
family tax credit in an amount equal to the sum of— 
‘‘(1) the base family credit amount, plus 
‘‘(2) the additional family credit amount. 
‘‘(b) BASE FAMILY CREDIT AMOUNT.—The base 
family credit amount shall be the sum of the credit amount 
for each status, determined in accordance with the fol-
lowing table: 
‘‘Status is: 
Credit amount for status is: 
Married individuals filing joint return .....................................
$3,300
Unmarried individuals with one or more dependents ..............
$2,800
Unmarried individuals with no dependents .............................
$1,650
Each dependent ........................................................................
$1,150. 
‘‘(c) ADDITIONAL FAMILY CREDIT AMOUNT.—The 
additional family credit amount shall be the sum of the 
credit amount for each dependent of the taxpayer, deter-
mined as follows: 
‘‘(1) In the case of each qualifying child, the 
amount shall be $1,500.
‘‘(2) In the case of each qualifying relative, the 
amount shall be $500. 
‘‘(d) DEPENDENT; QUALIFYING CHILD, AND QUALI-
FYING RELATIVE DEFINED.—For purposes of this sec-
tion, the terms ‘dependent’, ‘qualifying child’, and ‘quali-
fying relative’ shall have the meaning given such terms 
by section 152 of the Internal Revenue Code of 1986. 
‘‘SEC. 22. WORK TAX CREDIT. 
‘‘(a) IN GENERAL.—The taxpayer shall be allowed a 
work tax credit in an amount equal to taxable income re-
duced (but not below zero) by the family tax credit. 
‘‘(b) LIMITATIONS.—The amount of the credit al-
lowed under subsection (a) shall not exceed the sum of— 
‘‘(1) the base work tax credit amount, plus 
‘‘(2) the additional work tax credit amount. 
‘‘(c) BASE WORK TAX CREDIT AMOUNT.—For pur-
poses of this section— 
‘‘(1) IN
GENERAL.—The base work credit 
amount with respect to a taxpayer shall be the lesser 
of— 
‘‘(A) the applicable percentage of the work 
income of the taxpayer, or 
‘‘(B) the base work credit dollar amount. 
‘‘(2) APPLICABLE
PERCENTAGE; APPLICABLE 
DOLLAR
LIMITATION.—The applicable percentage
and the applicable dollar limitation shall be deter-
mined under the following table: 
‘‘In the case of a taxpayer 
with— 
The applicable per-
centage is— 
The appli-
cable dol-
lar limita-
tion is— 
No qualifying children ..............................
7.65 percent .......................
$412
1 qualifying child ......................................
34 percent ..........................
$2,120
2 or more qualifying children .................
40 percent ..........................
$3,200. 
‘‘(d) ADDITIONAL WORK TAX CREDIT AMOUNT.— 
For purposes of this section— 
‘‘(1) TAXPAYER WITH 1 QUALIFYING CHILD.— 
In the case of a taxpayer with 1 qualifying child, the 
additional work credit amount shall be the lesser 
of— 
‘‘(A) 34 percent of the excess of— 
‘‘(i) work income (or modified taxable 
income, if less), over 
‘‘(ii) $6,235, and 
‘‘(B) $1,450. 
‘‘(2) TAXPAYER WITH 2 OR MORE QUALIFYING 
CHILDREN.—In the case of a taxpayer with 2 or 
more qualifying children, the additional work credit 
amount shall be the lesser of— 
‘‘(A) 40 percent of the excess of— 
‘‘(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-
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. 
‘‘(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 
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 
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 
‘‘(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 
‘‘(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. 
‘‘(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 
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 
‘‘(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-