[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[S. 9 Introduced in Senate (IS)]







107th CONGRESS
  1st Session
                                  S. 9

 To amend the Internal Revenue Code of 1986 to provide tax relief, and 
                          for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                            January 22, 2001

Mr. Daschle (for himself, Mr. Baucus, Mr. Dorgan, Mr. Reid, Mr. Durbin, 
 Mr. Rockefeller, Mrs. Clinton, Mr. Kerry, Mr. Schumer, Mr. Dodd, and 
  Mr. Conrad) introduced the following bill; which was read twice and 
                  referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to provide tax relief, and 
                          for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; ETC.

    (a) Short Title.--This Act may be cited as the ``Working Family Tax 
Relief Act of 2001''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; etc.
                  TITLE I--MARRIAGE PENALTY TAX RELIEF

Sec. 101. Optional separate calculations.
                      TITLE II--ESTATE TAX RELIEF

Sec. 201. Increase in amount of unified credit against estate and gift 
                            taxes.
Sec. 202. Increase in qualified family-owned business interest 
                            deduction amount.
         TITLE III--TAX RELIEF FOR AFFORDABLE HIGHER EDUCATION

Sec. 301. Deduction for higher education expenses.
         TITLE IV--TAX RELIEF FOR FAMILY CHOICES IN CHILD CARE

                 Subtitle A--Dependent Care Tax Credit

Sec. 401. Expanding the dependent care tax credit.
Sec. 402. Minimum credit allowed for stay-at-home parents.
Sec. 403. Credit made refundable.
        Subtitle B--Incentives for Employer-Provided Child Care

Sec. 411. Allowance of credit for employer expenses for child care 
                            assistance.
             TITLE V--TAX RELIEF FOR LONG-TERM CARE GIVERS

Sec. 501. Long-term care tax credit.
               TITLE VI--TAX RELIEF FOR WORKING FAMILIES

Sec. 601. Increased earned income tax credit for 2 or more qualifying 
                            children.
Sec. 602. Simplification of definition of earned income.
Sec. 603. Simplification of definition of child dependent.
Sec. 604. Other modifications to earned income tax credit.
          TITLE VII--TAX RELIEF FOR SELF-EMPLOYED INDIVIDUALS

Sec. 701. Deduction for health insurance costs of self-employed 
                            individuals increased.
       TITLE VIII--TAX RELIEF FOR EXPANDING PENSION AVAILABILITY

Sec. 801. Nonrefundable credit to certain individuals for elective 
                            deferrals and IRA contributions.
Sec. 802. Credit for qualified pension plan contributions of small 
                            employers.
Sec. 803. Credit for pension plan startup costs of small employers.
               TITLE IX--TAX RELIEF FOR ADOPTIVE PARENTS

Sec. 901. Expansion of adoption credit.

                  TITLE I--MARRIAGE PENALTY TAX RELIEF

SEC. 101. OPTIONAL SEPARATE CALCULATIONS.

    (a) In General.--Subpart B of part II of subchapter A of chapter 61 
(relating to income tax returns) is amended by inserting after section 
6013 the following new section:

``SEC. 6013A. COMBINED RETURN WITH SEPARATE RATES.

    ``(a) General Rule.--A husband and wife may make a combined return 
of income taxes under subtitle A under which--
            ``(1) a separate taxable income is determined for each 
        spouse by applying the rules provided in this section, and
            ``(2) the tax imposed by section 1 is the aggregate amount 
        resulting from applying the separate rates set forth in section 
        1(c) to each such taxable income.
    ``(b) Treatment of Income.--For purposes of this section--
            ``(1) earned income (within the meaning of section 911(d)), 
        and any income received as a pension or annuity which arises 
        from an employer-employee relationship, shall be treated as the 
        income of the spouse who rendered the services,
            ``(2) income from property shall be divided between the 
        spouses in accordance with their respective ownership rights in 
        such property (equally in the case of property held jointly by 
        the spouses), and
            ``(3) any exclusion from income shall be allowable to the 
        spouse with respect to whom the income would be otherwise 
        includible.
    ``(c) Treatment of Deductions.--For purposes of this section--
            ``(1) except as otherwise provided in this subsection, the 
        deductions described in section 62(a) shall be allowed to the 
        spouse treated as having the income to which such deductions 
        relate,
            ``(2) the deductions allowable by section 151(b) (relating 
        to personal exemptions for taxpayer and spouse) shall be 
        determined by allocating 1 personal exemption to each spouse,
            ``(3) section 63 shall be applied as if such spouses were 
        not married, except that the election whether or not to itemize 
        deductions shall be made jointly by both spouses and apply to 
        each, and
            ``(4) each spouse's share of all other deductions shall be 
        determined by multiplying the aggregate amount thereof by the 
        fraction--
                    ``(A) the numerator of which is such spouse's gross 
                income, and
                    ``(B) the denominator of which is the combined 
                gross incomes of the 2 spouses.
Any fraction determined under paragraph (4) shall be rounded to the 
nearest percentage point.
    ``(d) Treatment of Credits.--For purposes of this section--
            ``(1) In general.--Except as provided in paragraph (2), 
        each spouse's share of credits allowed to both spouses shall be 
        determined by multiplying the aggregate amount of the credits 
        by the fraction determined under subsection (c)(4).
            ``(2) Earned income credit.--The earned income credit under 
        section 32 shall be determined as if each spouse were a 
        separate taxpayer, except that--
                    ``(A) the earned income and the modified adjusted 
                gross income of each spouse shall be determined under 
                the rules of subsections (b), (c), and (e), and
                    ``(B) qualifying children shall be allocated 
                between spouses proportionate to the earned income of 
                each spouse (rounded to the nearest whole number).
    ``(e) Special Rules Regarding Income Limitations.--
            ``(1) Exclusions and deductions.--For purposes of making a 
        determination under subsection (b) or (c), any eligibility 
        limitation with respect to each spouse shall be determined by 
        taking into account the limitation applicable to a single 
        individual.
            ``(2) Credits.--For purposes of making a determination 
        under subsection (d)(1), in no event shall an eligibility 
        limitation for any credit allowable to both spouses be less 
        than twice such limitation applicable to a single individual.
    ``(f) Special Rules for Alternative Minimum Tax.--If a husband and 
wife elect the application of this section--
            ``(1) the tax imposed by section 55 shall be computed 
        separately for each spouse, and
            ``(2) for purposes of applying section 55--
                    ``(A) the rules under this section for allocating 
                items of income, deduction, and credit shall apply, and
                    ``(B) the exemption amount for each spouse shall be 
                the amount determined under section 55(d)(1)(B).
    ``(g) Treatment as Joint Return.--Except as otherwise provided in 
this section or in the regulations prescribed hereunder, for purposes 
of this title (other than sections 1 and 63(c)) a combined return under 
this section shall be treated as a joint return.
    ``(h) Limitations.--
            ``(1) Phase-in of benefit.--
                    ``(A) In general.--In the case of any taxable year 
                beginning before January 1, 2005, the tax imposed by 
                section 1 or 55 shall in no event be less than the sum 
                of--
                            ``(i) the tax determined after the 
                        application of this section, plus
                            ``(ii) the applicable percentage of the 
                        excess of--
                                    ``(I) the tax determined without 
                                the application of this section, over
                                    ``(II) the amount determined under 
                                clause (i).
                    ``(B) Applicable percentage.--For purposes of 
                subparagraph (A), the applicable percentage shall be 
                determined in accordance with the following table:

                                                         The applicable
``For taxable years beginning in:                        percentage is:
    2003..........................................                  50 
    2004..........................................                  10.
            ``(2) Limitation of benefit based on combined adjusted 
        gross income.--With respect to spouses electing the treatment 
        of this section for any taxable year, the tax under section 1 
        or 55 shall be increased by an amount which bears the same 
        ratio to the excess of the tax determined without the 
        application of this section over the tax determined after the 
        application of this section as the ratio (but not over 100 
        percent) of the excess of the combined adjusted gross income of 
        the spouses over $100,000 bears to $50,000.
    ``(i) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out this section.''.
    (b) Unmarried Rate Made Applicable.--So much of subsection (c) of 
section 1 as precedes the table is amended to read as follows:
    ``(c) Separate or Unmarried Return Rate.--There is hereby imposed 
on the taxable income of every individual (other than a married 
individual (as defined in section 7703) filing a return which is not a 
combined return under section 6013A, a surviving spouse as defined in 
section 2(a), or a head of household as defined in section 2(b)) a tax 
determined in accordance with the following table:''.
    (c) Penalty for Substantial Understatement of Income From 
Property.--Section 6662 (relating to imposition of accuracy-related 
penalty) is amended--
            (1) by adding at the end of subsection (b) the following 
        new paragraph:
            ``(6) Any substantial understatement of income from 
        property under section 6013A.'', and
            (2) by adding at the end the following new subsection:
    ``(i) Substantial Understatement of Income From Property Under 
Section 6013A.--For purposes of this section, there is a substantial 
understatement of income from property under section 6013A if--
            ``(1) the spouses electing the treatment of such section 
        for any taxable year transfer property from 1 spouse to the 
        other spouse in such year,
            ``(2) such transfer results in reduced tax liability under 
        such section, and
            ``(3) the significant purpose of such transfer is the 
        avoidance or evasion of Federal income tax.''.
    (d) Protection of Social Security and Medicare Trust Funds.--
            (1) In general.--Nothing in this section shall be construed 
        to alter or amend the Social Security Act (or any regulation 
        promulgated under that Act).
            (2) Transfers.--
                    (A) Estimate of secretary.--The Secretary of the 
                Treasury shall annually estimate the impact that the 
                enactment of this section has on the income and 
                balances of the trust funds established under sections 
                201 and 1817 of the Social Security Act (42 U.S.C. 401 
                and 1395i).
                    (B) Transfer of funds.--If, under subparagraph (A), 
                the Secretary of the Treasury estimates that the 
                enactment of this section has a negative impact on the 
                income and balances of such trust funds, the Secretary 
                shall transfer, not less frequently than quarterly, 
                from the general revenues of the Federal Government an 
                amount sufficient so as to ensure that the income and 
                balances of such trust funds are not reduced as a 
                result of the enactment of this section.
    (e) Clerical Amendment.--The table of sections for subpart B of 
part II of subchapter A of chapter 61 is amended by inserting after the 
item relating to section 6013 the following new item:

                              ``Sec. 6013A. Combined return with 
                                        separate rates.''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

                      TITLE II--ESTATE TAX RELIEF

SEC. 201. INCREASE IN AMOUNT OF UNIFIED CREDIT AGAINST ESTATE AND GIFT 
              TAXES.

    (a) In General.--The table contained in section 2010(c) (relating 
to applicable credit amount) is amended to read as follows:

        ``In the case of estates of decedents
                                                         The applicable
          dying, and gifts made, during:
                                                   exclusion amount is:
                  2002, 2003, 2004, 2005, and 2006...       $1,000,000 
                  2007 and 2008......................       $1,125,000 
                  2009...............................       $1,500,000 
                  2010 or thereafter.................    $2,000,000.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to the estates of decedents dying, and gifts made, after December 31, 
2001.

SEC. 202. INCREASE IN QUALIFIED FAMILY-OWNED BUSINESS INTEREST 
              DEDUCTION AMOUNT.

    (a) In General.--Paragraph (2) of section 2057(a) (relating to 
family-owned business interests) is amended to read as follows:
            ``(2) Maximum deduction.--
                    ``(A) In general.--The deduction allowed by this 
                section shall not exceed the sum of--
                            ``(i) the applicable deduction amount, plus
                            ``(ii) in the case of a decedent described 
                        in subparagraph (C), the applicable unused 
                        spousal deduction amount.
                    ``(B) Applicable deduction amount.--For purposes of 
                this subparagraph (A)(i), the applicable deduction 
                amount is determined in accordance with the following 
                table:

        ``In the case of estates of decedents
                                                         The applicable
          dying during:
                                                   deduction amount is:
                  2002, 2003, 2004, 2005, and 2006...        $1,375,000
                  2007 and 2008......................        $1,625,000
                  2009...............................        $2,375,000
                  2010 or thereafter.................       $3,375,000.
                    ``(C) Applicable unused spousal deduction amount.--
                With respect to a decedent whose immediately 
                predeceased spouse died after December 31, 2001, and 
                the estate of such immediately predeceased spouse met 
                the requirements of subsection (b)(1), the applicable 
                unused spousal deduction amount for such decedent is 
                equal to the excess of--
                            ``(i) the applicable deduction amount 
                        allowable under this section to the estate of 
                        such immediately predeceased spouse, over
                            ``(ii) the sum of--
                                    ``(I) the applicable deduction 
                                amount allowed under this section to 
                                the estate of such immediately 
                                predeceased spouse, plus
                                    ``(II) the amount of any increase 
                                in such estate's unified credit under 
                                paragraph (3)(B) which was allowed to 
                                such estate.''.
    (b) Conforming Amendments.--Section 2057(a)(3)(B) is amended--
            (1) by striking ``$675,000'' both places it appears and 
        inserting ``the applicable deduction amount'', and
            (2) by striking ``$675,000'' in the heading and inserting 
        ``applicable deduction amount''.
    (c) Effective Date.--The amendment made by this section shall apply 
to the estates of decedents dying, and gifts made, after December 31, 
2001.

         TITLE III--TAX RELIEF FOR AFFORDABLE HIGHER EDUCATION

SEC. 301. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

    (a) Deduction Allowed.--Part VII of subchapter B of chapter 1 
(relating to additional itemized deductions for individuals) is amended 
by redesignating section 222 as section 223 and by inserting after 
section 221 the following new section:

``SEC. 222. HIGHER EDUCATION EXPENSES.

    ``(a) Allowance of Deduction.--
            ``(1) In general.--In the case of an individual, there 
        shall be allowed as a deduction an amount equal to the 
        applicable dollar amount of the qualified higher education 
        expenses paid by the taxpayer during the taxable year.
            ``(2) Applicable dollar amount.--The applicable dollar 
        amount for any taxable year shall be determined as follows:

                                                             Applicable
``Taxable year:                                          dollar amount:
    2002..........................................              $4,000 
    2003..........................................              $8,000 
    2004 and thereafter...........................             $12,000.
    ``(b) Limitation Based on Modified Adjusted Gross Income.--
            ``(1) In general.--The amount which would (but for this 
        subsection) be taken into account under subsection (a) shall be 
        reduced (but not below zero) by the amount determined under 
        paragraph (2).
            ``(2) Amount of reduction.--The amount determined under 
        this paragraph equals the amount which bears the same ratio to 
        the amount which would be so taken into account as--
                    ``(A) the excess of--
                            ``(i) the taxpayer's modified adjusted 
                        gross income for such taxable year, over
                            ``(ii) $62,450 ($104,050 in the case of a 
                        joint return, $89,150 in the case of a return 
                        filed by a head of household, and $52,025 in 
                        the case of a return by a married individual 
                        filing separately), bears to
                    ``(B) $15,000.
            ``(3) Modified adjusted gross income.--For purposes of this 
        subsection, the term `modified adjusted gross income' means the 
        adjusted gross income of the taxpayer for the taxable year 
        determined--
                    ``(A) without regard to this section and sections 
                911, 931, and 933, and
                    ``(B) after the application of sections 86, 135, 
                219, 220, and 469.
        For purposes of the sections referred to in subparagraph (B), 
        adjusted gross income shall be determined without regard to the 
        deduction allowed under this section.
    ``(c) Qualified Higher Education Expenses.--For purposes of this 
section--
            ``(1) Qualified higher education expenses.--
                    ``(A) In general.--The term `qualified higher 
                education expenses' means tuition and fees charged by 
                an educational institution and required for the 
                enrollment or attendance of--
                            ``(i) the taxpayer,
                            ``(ii) the taxpayer's spouse,
                            ``(iii) any dependent of the taxpayer with 
                        respect to whom the taxpayer is allowed a 
                        deduction under section 151, or
                            ``(iv) any grandchild of the taxpayer,
                as an eligible student at an institution of higher 
                education.
                    ``(B) Eligible courses.--Amounts paid for qualified 
                higher education expenses of any individual shall be 
                taken into account under subsection (a) only to the 
                extent such expenses--
                            ``(i) are attributable to courses of 
                        instruction for which credit is allowed toward 
                        a baccalaureate degree by an institution of 
                        higher education or toward a certificate of 
                        required course work at a vocational school, 
                        and
                            ``(ii) are not attributable to any graduate 
                        program of such individual.
                    ``(C) Exception for nonacademic fees.--Such term 
                does not include any student activity fees, athletic 
                fees, insurance expenses, or other expenses unrelated 
                to a student's academic course of instruction.
                    ``(D) Eligible student.--For purposes of 
                subparagraph (A), the term `eligible student' means a 
                student who--
                            ``(i) meets the requirements of section 
                        484(a)(1) of the Higher Education Act of 1965 
                        (20 U.S.C. 1091(a)(1)), as in effect on the 
                        date of the enactment of this section, and
                            ``(ii) is carrying at least one-half the 
                        normal full-time work load for the course of 
                        study the student is pursuing, as determined by 
                        the institution of higher education.
                    ``(E) Identification requirement.--No deduction 
                shall be allowed under subsection (a) to a taxpayer 
                with respect to an eligible student unless the taxpayer 
                includes the name, age, and taxpayer identification 
                number of such eligible student on the return of tax 
                for the taxable year.
            ``(2) Institution of higher education.--The term 
        `institution of higher education' means an institution which--
                    ``(A) is described in section 481 of the Higher 
                Education Act of 1965 (20 U.S.C. 1088), as in effect on 
                the date of the enactment of this section, and
                    ``(B) is eligible to participate in programs under 
                title IV of such Act.
    ``(d) Special Rules.--
            ``(1) No double benefit.--
                    ``(A) In general.--No deduction shall be allowed 
                under subsection (a) for any expense for which a 
                deduction is allowable to the taxpayer under any other 
                provision of this chapter unless the taxpayer 
                irrevocably waives his right to the deduction of such 
                expense under such other provision.
                    ``(B) Denial of deduction if credit elected.--No 
                deduction shall be allowed under subsection (a) for a 
                taxable year with respect to the qualified higher 
                education expenses of an individual if the taxpayer 
                elects to have section 25A apply with respect to such 
                individual for such year.
                    ``(C) Dependents.--No deduction shall be allowed 
                under subsection (a) to any individual with respect to 
                whom a deduction under section 151 is allowable to 
                another taxpayer for a taxable year beginning in the 
                calendar year in which such individual's taxable year 
                begins.
                    ``(D) Coordination with exclusions.--A deduction 
                shall be allowed under subsection (a) for qualified 
                higher education expenses only to the extent the amount 
                of such expenses exceeds the amount excludable under 
                section 135 or 530(d)(2) for the taxable year.
            ``(2) Limitation on taxable year of deduction.--
                    ``(A) In general.--A deduction shall be allowed 
                under subsection (a) for qualified higher education 
                expenses for any taxable year only to the extent such 
                expenses are in connection with enrollment at an 
                institution of higher education during the taxable 
                year.
                    ``(B) Certain prepayments allowed.--Subparagraph 
                (A) shall not apply to qualified higher education 
                expenses paid during a taxable year if such expenses 
                are in connection with an academic term beginning 
                during such taxable year or during the first 3 months 
                of the next taxable year.
            ``(3) Adjustment for certain scholarships and veterans 
        benefits.--The amount of qualified higher education expenses 
        otherwise taken into account under subsection (a) with respect 
        to the education of an individual shall be reduced (before the 
        application of subsection (b)) by the sum of the amounts 
        received with respect to such individual for the taxable year 
        as--
                    ``(A) a qualified scholarship which under section 
                117 is not includable in gross income,
                    ``(B) an educational assistance allowance under 
                chapter 30, 31, 32, 34, or 35 of title 38, United 
                States Code, or
                    ``(C) a payment (other than a gift, bequest, 
                devise, or inheritance within the meaning of section 
                102(a)) for educational expenses, or attributable to 
                enrollment at an eligible educational institution, 
                which is exempt from income taxation by any law of the 
                United States.
            ``(4) No deduction for married individuals filing separate 
        returns.--If the taxpayer is a married individual (within the 
        meaning of section 7703), this section shall apply only if the 
        taxpayer and the taxpayer's spouse file a joint return for the 
        taxable year.
            ``(5) Nonresident aliens.--If the taxpayer is a nonresident 
        alien individual for any portion of the taxable year, this 
        section shall apply only if such individual is treated as a 
        resident alien of the United States for purposes of this 
        chapter by reason of an election under subsection (g) or (h) of 
        section 6013.
            ``(6) Regulations.--The Secretary may prescribe such 
        regulations as may be necessary or appropriate to carry out 
        this section, including regulations requiring recordkeeping and 
        information reporting.''.
    (b) Deduction Allowed in Computing Adjusted Gross Income.--Section 
62(a) is amended by inserting after paragraph (17) the following new 
paragraph:
            ``(18) Higher education expenses.--The deduction allowed by 
        section 222.''.
    (c) Conforming Amendment.--The table of sections for part VII of 
subchapter B of chapter 1 is amended by striking the item relating to 
section 222 and inserting the following new items:

                              ``Sec. 222. Higher education expenses.
                              ``Sec. 223. Cross reference.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to payments made in taxable years beginning after December 31, 
2001.

         TITLE IV--TAX RELIEF FOR FAMILY CHOICES IN CHILD CARE

                 Subtitle A--Dependent Care Tax Credit

SEC. 401. EXPANDING THE DEPENDENT CARE TAX CREDIT.

    (a) Percentage of Employment-Related Expenses Determined by 
Taxpayer Status.--Section 21(a)(2) (defining applicable percentage) is 
amended to read as follows:
            ``(2) Applicable percentage defined.--For purposes of 
        paragraph (1), the term `applicable percentage' means--
                    ``(A) except as provided in subparagraph (B), 50 
                percent reduced (but not below 20 percent) by 1 
                percentage point for each $1,000, or fraction thereof, 
                by which the taxpayers's adjusted gross income for the 
                taxable year exceeds $30,000, and
                    ``(B) in the case of employment-related expenses 
                described in subsection (e)(11), 50 percent reduced 
                (but not below zero) by 1 percentage point for each 
                $800, or fraction thereof, by which the taxpayers's 
                adjusted gross income for the taxable year exceeds 
                $30,000.''.
    (b) Inflation Adjustment for Allowable Expenses.--Section 21(c) 
(relating to dollar limit on amount creditable) is amended by striking 
``The amount determined'' and inserting ``In the case of any taxable 
year beginning after 2002, each dollar amount referred to in paragraphs 
(1) and (2) shall be increased by an amount equal to such dollar amount 
multiplied by the cost-of-living adjustment determined under section 
1(f)(3) for the calendar year in which the taxable year begins, by 
substituting `calendar year 2001' for `calendar year 1992' in 
subparagraph (B) thereof. If any dollar amount after being increased 
under the preceding sentence is not a multiple of $10, such dollar 
amount shall be rounded to the nearest multiple of $10. The amount 
determined''.
    (c) Effective Date.--The amendments made by this section apply to 
taxable years beginning after December 31, 2001.

SEC. 402. MINIMUM CREDIT ALLOWED FOR STAY-AT-HOME PARENTS.

    (a) In General.--Section 21(e) (relating to special rules) is 
amended by adding at the end the following new paragraph:
            ``(11) Minimum credit allowed for stay-at-home parents.--
        Notwithstanding subsection (d), in the case of any taxpayer 
        with one or more qualifying individuals described in subsection 
        (b)(1)(A) under the age of 1 at any time during the taxable 
        year, such taxpayer shall be deemed to have employment-related 
        expenses with respect to such qualifying individuals in an 
        amount equal to the sum of--
                    ``(A) $90 for each month in such taxable year 
                during which at least one of such qualifying 
                individuals is under the age of 1, and
                    ``(B) the amount of employment-related expenses 
                otherwise incurred for such qualifying individuals for 
                the taxable year (determined under this section without 
regard to this paragraph).''.
    (b) Effective Date.--The amendments made by this section apply to 
taxable years beginning after December 31, 2001.

SEC. 403. CREDIT MADE REFUNDABLE.

    (a) In General.--Part IV of subchapter A of chapter 1 (relating to 
credits against tax) is amended--
            (1) by redesignating section 35 as section 36, and
            (2) by redesignating section 21 as section 35.
    (b) Advance Payment of Credit.--Chapter 25 (relating to general 
provisions relating to employment taxes) is amended by inserting after 
section 3507 the following new section:

``SEC. 3507A. ADVANCE PAYMENT OF DEPENDENT CARE CREDIT.

    ``(a) General Rule.--Except as otherwise provided in this section, 
every employer making payment of wages with respect to whom a dependent 
care eligibility certificate is in effect shall, at the time of paying 
such wages, make an additional payment equal to such employee's 
dependent care advance amount.
    ``(b) Dependent Care Eligibility Certificate.--For purposes of this 
title, a dependent care eligibility certificate is a statement 
furnished by an employee to the employer which--
            ``(1) certifies that the employee will be eligible to 
        receive the credit provided by section 35 for the taxable year,
            ``(2) certifies that the employee reasonably expects to be 
        an applicable taxpayer for the taxable year,
            ``(3) certifies that the employee does not have a dependent 
        care eligibility certificate in effect for the calendar year 
        with respect to the payment of wages by another employer,
            ``(4) states whether or not the employee's spouse has a 
        dependent care eligibility certificate in effect,
            ``(5) states the number of qualifying individuals in the 
        household maintained by the employee, and
            ``(6) estimates the amount of employment-related expenses 
        for the calendar year.
    ``(c) Dependent Care Advance Amount.--
            ``(1) In general.--For purposes of this title, the term 
        `dependent care advance amount' means, with respect to any 
        payroll period, the amount determined--
                    ``(A) on the basis of the employee's wages from the 
                employer for such period,
                    ``(B) on the basis of the employee's estimated 
                employment-related expenses included in the dependent 
                care eligibility certificate, and
                    ``(C) in accordance with tables provided by the 
                Secretary.
            ``(2) Advance amount tables.--The tables referred to in 
        paragraph (1)(C) shall be similar in form to the tables 
        prescribed under section 3402 and, to the maximum extent 
        feasible, shall be coordinated with such tables and the tables 
        prescribed under section 3507(c).
    ``(d) Other Rules.--For purposes of this section, rules similar to 
the rules of subsections (d) and (e) of section 3507 shall apply.
    ``(e) Definitions.--For purposes of this section, terms used in 
this section which are defined in section 35 shall have the respective 
meanings given such terms by section 35.''.
    (c) Conforming Amendments.--
            (1) Section 35(a)(1), as redesignated by subsection (a)(1), 
        is amended by striking ``chapter'' and inserting ``subtitle''.
            (2) Section 35(e), as so redesignated and amended by 
        section 402(a), is amended by adding at the end the following 
        new paragraph:
            ``(12) Coordination with advance payments and minimum 
        tax.--Rules similar to the rules of subsections (g) and (h) of 
        section 32 shall apply for purposes of this section.''.
            (3) Sections 23(f)(1) and 129(a)(2)(C) are each amended by 
        striking ``section 21(e)'' and inserting ``section 35(e)''.
            (4) Section 129(b)(2) is amended by striking ``section 
        21(d)(2)'' and inserting ``section 35(d)(2)''.
            (5) Section 129(e)(1) is amended by striking ``section 
        21(b)(2)'' and inserting ``section 35(b)(2)''.
            (6) Section 213(e) is amended by striking ``section 21'' 
        and inserting ``section 35''.
            (7) Section 995(f)(2)(C) is amended by striking ``and 34'' 
        and inserting ``34, and 35''.
            (8) Section 6211(b)(4)(A) is amended by striking ``and 34'' 
        and inserting ``, 34, and 35''.
            (9) Section 6213(g)(2)(H) is amended by striking ``section 
        21'' and inserting ``section 35''.
            (10) Section 6213(g)(2)(L) is amended by striking ``section 
        21, 24, or 32'' and inserting ``section 24, 32, or 35''.
            (11) The table of sections for subpart C of part IV of 
        subchapter A of chapter 1 is amended by striking the item 
        relating to section 35 and inserting the following new items:

                              ``Sec. 35. Expenses for household and 
                                        dependent care services 
                                        necessary for gainful 
                                        employment.
                              ``Sec. 36. Overpayments of tax.''.
            (12) The table of sections for subpart A of such part IV is 
        amended by striking the item relating to section 21.
            (13) The table of sections for chapter 25 is amended by 
        adding after the item relating to section 3507 the following 
        new item:

                              ``Sec. 3507A. Advance payment of 
                                        dependent care credit.''.
            (14) Section 1324(b)(2) of title 31, United States Code, is 
        amended by striking ``or'' before ``enacted'' and by inserting 
        before the period at the end ``, or from section 35 of such 
        Code''.
    (d) Effective Date.--The amendments made by this section apply to 
taxable years beginning after December 31, 2001.

        Subtitle B--Incentives for Employer-Provided Child Care

SEC. 411. ALLOWANCE OF CREDIT FOR EMPLOYER EXPENSES FOR CHILD CARE 
              ASSISTANCE.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
(relating to business related credits) is amended by adding at the end 
the following new section:

``SEC. 45E. EMPLOYER-PROVIDED CHILD CARE CREDIT.

    ``(a) In General.--For purposes of section 38, the employer-
provided child care credit determined under this section for the 
taxable year is an amount equal to the sum of--
            ``(1) 25 percent of the qualified child care expenditures, 
        and
            ``(2) 10 percent of the qualified child care resource and 
        referral expenditures,
of the taxpayer for such taxable year.
    ``(b) Dollar Limitation.--The credit allowable under subsection (a) 
for any taxable year shall not exceed $150,000.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Qualified child care expenditure.--
                    ``(A) In general.--The term `qualified child care 
                expenditure' means any amount paid or incurred--
                            ``(i) to acquire, construct, rehabilitate, 
                        or expand property--
                                    ``(I) which is to be used as part 
                                of a qualified child care facility of 
                                the taxpayer,
                                    ``(II) with respect to which a 
                                deduction for depreciation (or 
                                amortization in lieu of depreciation) 
                                is allowable, and
                                    ``(III) which does not constitute 
                                part of the principal residence (within 
                                the meaning of section 121) of the 
                                taxpayer or any employee of the 
                                taxpayer,
                            ``(ii) for the operating costs of a 
                        qualified child care facility of the taxpayer, 
                        including costs related to the training of 
                        employees, to scholarship programs, and to the 
                        providing of increased compensation to 
                        employees with higher levels of child care 
                        training,
                            ``(iii) under a contract with a qualified 
                        child care facility to provide child care 
                        services to employees of the taxpayer, or
                            ``(iv) to reimburse an employee for 
                        expenses for child care which enables the 
                        employee to be gainfully employed including 
                        expenses related to--
                                    ``(I) day care and before and after 
                                school care,
                                    ``(II) transportation associated 
                                with such care, and
                                    ``(III) before and after school and 
                                holiday programs including educational 
                                and recreational programs and camp 
                                programs.
                    ``(B) Fair market value.--The term `qualified child 
                care expenditures' shall not include expenses in excess 
                of the fair market value of such care.
            ``(2) Qualified child care facility.--
                    ``(A) In general.--The term `qualified child care 
                facility' means a facility--
                            ``(i) the principal use of which is to 
                        provide child care assistance, and
                            ``(ii) which meets the requirements of all 
                        applicable laws and regulations of the State or 
                        local government in which it is located, 
                        including the licensing of the facility as a 
                        child care facility.
                Clause (i) shall not apply to a facility which is the 
                principal residence (within the meaning of section 121) 
                of the operator of the facility.
                    ``(B) Special rules with respect to a taxpayer.--A 
                facility shall not be treated as a qualified child care 
                facility with respect to a taxpayer unless--
                            ``(i) enrollment in the facility is open to 
                        employees of the taxpayer during the taxable 
                        year,
                            ``(ii) if the facility is the principal 
                        trade or business of the taxpayer, at least 30 
                        percent of the enrollees of such facility are 
                        dependents of employees of the taxpayer, and
                            ``(iii) the use of such facility (or the 
                        eligibility to use such facility) does not 
                        discriminate in favor of employees of the 
                        taxpayer who are highly compensated employees 
                        (within the meaning of section 414(q)).
            ``(3) Qualified child care resource and referral 
        expenditure.--The term `qualified child care resource and 
        referral expenditure' means any amount paid or incurred under a 
        contract to provide child care resource and referral services 
        to an employee of the taxpayer.
    ``(d) Recapture of Acquisition and Construction Credit.--
            ``(1) In general.--If, as of the close of any taxable year, 
        there is a recapture event with respect to any qualified child 
care facility of the taxpayer, then the tax of the taxpayer under this 
chapter for such taxable year shall be increased by an amount equal to 
the product of--
                    ``(A) the applicable recapture percentage, and
                    ``(B) the aggregate decrease in the credits allowed 
                under section 38 for all prior taxable years which 
                would have resulted if the qualified child care 
                expenditures of the taxpayer described in subsection 
                (c)(1)(A) with respect to such facility had been zero.
            ``(2) Applicable recapture percentage.--
                    ``(A) In general.--For purposes of this subsection, 
                the applicable recapture percentage shall be determined 
                from the following table:

  
                                                         The applicable
  
                                                              recapture
            ``If the recapture event occurs in:
                                                         percentage is:
                Years 1-3............................          100     
                Year 4...............................           85     
                Year 5...............................           70     
                Year 6...............................           55     
                Year 7...............................           40     
                Year 8...............................           25     
                Years 9 and 10.......................           10     
                Years 11 and thereafter..............            0.    
                    ``(B) Years.--For purposes of subparagraph (A), 
                year 1 shall begin on the first day of the taxable year 
                in which the qualified child care facility is placed in 
                service by the taxpayer.
            ``(3) Recapture event defined.--For purposes of this 
        subsection, the term `recapture event' means--
                    ``(A) Cessation of operation.--The cessation of the 
                operation of the facility as a qualified child care 
                facility.
                    ``(B) Change in ownership.--
                            ``(i) In general.--Except as provided in 
                        clause (ii), the disposition of a taxpayer's 
                        interest in a qualified child care facility 
                        with respect to which the credit described in 
                        subsection (a) was allowable.
                            ``(ii) Agreement to assume recapture 
                        liability.--Clause (i) shall not apply if the 
                        person acquiring such interest in the facility 
                        agrees in writing to assume the recapture 
                        liability of the person disposing of such 
                        interest in effect immediately before such 
                        disposition. In the event of such an 
                        assumption, the person acquiring the interest 
                        in the facility shall be treated as the 
                        taxpayer for purposes of assessing any 
                        recapture liability (computed as if there had 
                        been no change in ownership).
            ``(4) Special rules.--
                    ``(A) Tax benefit rule.--The tax for the taxable 
                year shall be increased under paragraph (1) only with 
                respect to credits allowed by reason of this section 
                which were used to reduce tax liability. In the case of 
                credits not so used to reduce tax liability, the 
                carryforwards and carrybacks under section 39 shall be 
                appropriately adjusted.
                    ``(B) No credits against tax.--Any increase in tax 
                under this subsection shall not be treated as a tax 
                imposed by this chapter for purposes of determining the 
                amount of any credit under subpart A, B, or D of this 
                part.
                    ``(C) No recapture by reason of casualty loss.--The 
                increase in tax under this subsection shall not apply 
                to a cessation of operation of the facility as a 
                qualified child care facility by reason of a casualty 
                loss to the extent such loss is restored by 
                reconstruction or replacement within a reasonable 
                period established by the Secretary.
    ``(e) Special Rules.--For purposes of this section--
            ``(1) Aggregation rules.--All persons which are treated as 
        a single employer under subsections (a) and (b) of section 52 
        shall be treated as a single taxpayer.
            ``(2) Pass-thru in the case of estates and trusts.--Under 
        regulations prescribed by the Secretary, rules similar to the 
        rules of subsection (d) of section 52 shall apply.
            ``(3) Allocation in the case of partnerships.--In the case 
        of partnerships, the credit shall be allocated among partners 
        under regulations prescribed by the Secretary.
    ``(f) No Double Benefit.--
            ``(1) Reduction in basis.--For purposes of this subtitle--
                    ``(A) In general.--If a credit is determined under 
                this section with respect to any property by reason of 
                expenditures described in subsection (c)(1)(A), the 
                basis of such property shall be reduced by the amount 
                of the credit so determined.
                    ``(B) Certain dispositions.--If, during any taxable 
                year, there is a recapture amount determined with 
                respect to any property the basis of which was reduced 
                under subparagraph (A), the basis of such property 
                (immediately before the event resulting in such 
                recapture) shall be increased by an amount equal to 
                such recapture amount. For purposes of the preceding 
                sentence, the term `recapture amount' means any 
                increase in tax (or adjustment in carrybacks or 
                carryovers) determined under subsection (d).
            ``(2) Other deductions and credits.--No deduction or credit 
        shall be allowed under any other provision of this chapter with 
        respect to the amount of the credit determined under this 
        section.''.
    (b) Conforming Amendments.--
            (1) Section 38(b) is amended by striking ``plus'' at the 
        end of paragraph (12), by striking the period at the end of 
        paragraph (13) and inserting ``, plus'', and by adding at the 
        end the following new paragraph:
            ``(14) the employer-provided child care credit determined 
        under section 45E.''.
            (2) Subsection (d) of section 39 is amended by adding at 
        the end the following new paragraph:
            ``(10) No carryback of employer-provided child care credit 
        before january 1, 2002.--No portion of the unused business 
        credit for any taxable year which is attributable to the credit 
under section 45E may be carried back to a taxable year ending before 
January 1, 2002.''.
            (3) Subsection (c) of section 196 is amended by striking 
        ``and'' at the end of paragraph (8), by striking the period at 
        the end of paragraph (9) and inserting ``, and'', and by adding 
        at the end the following new paragraph:
            ``(10) the employer-provided child care credit determined 
        under section 45E(a).''.
            (4) The table of sections for subpart D of part IV of 
        subchapter A of chapter 1 is amended by adding at the end the 
        following new item:

                              ``Sec. 45E. Employer-provided child care 
                                        credit.''.
            (5) Section 1016(a) is amended by striking ``and'' at the 
        end of paragraph (26), by striking the period at the end of 
        paragraph (27) and inserting ``, and'', and by adding at the 
        end the following new paragraph:
            ``(28) in the case of a facility with respect to which a 
        credit was allowed under section 45E, to the extent provided in 
        section 45E(f)(1).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

             TITLE V--TAX RELIEF FOR LONG-TERM CARE GIVERS

SEC. 501. LONG-TERM CARE TAX CREDIT.

    (a) Allowance of Credit.--
            (1) In general.--Section 24(a) (relating to allowance of 
        child tax credit) is amended to read as follows:
    ``(a) Allowance of Credit.--There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year an amount 
equal to the sum of--
            ``(1) $500 multiplied by the number of qualifying children 
        of the taxpayer, plus
            ``(2) $3,000 multiplied by the number of applicable 
        individuals with respect to whom the taxpayer is an eligible 
        caregiver for the taxable year.''.
            (2) Additional credit for taxpayer with 3 or more separate 
        credit amounts.--So much of section 24(d) as precedes paragraph 
        (1)(A) thereof is amended to read as follows:
    ``(d) Additional Credit for Taxpayers With 3 or More Separate 
Credit Amounts.--
            ``(1) In general.--If the sum of the number of qualifying 
        children of the taxpayer and the number of applicable 
        individuals with respect to which the taxpayer is an eligible 
        caregiver is 3 or more for any taxable year, the aggregate 
        credits allowed under subpart C shall be increased by the 
        lesser of--''.
            (3) Conforming amendments.--
                    (A) The heading for section 32(n) is amended by 
                striking ``Child'' and inserting ``Family Care''.
                    (B) The heading for section 24 is amended to read 
                as follows:

``SEC. 24. FAMILY CARE CREDIT.''.

                    (C) The table of sections for subpart A of part IV 
                of subchapter A of chapter 1 is amended by striking the 
                item relating to section 24 and inserting the following 
                new item:

``Sec. 24. Family care credit.''.
    (b) Definitions.--Section 24(c) (defining qualifying child) is 
amended to read as follows:
    ``(c) Definitions.--For purposes of this section--
            ``(1) Qualifying child.--
                    ``(A) In general.--The term `qualifying child' 
                means any individual if--
                            ``(i) the taxpayer is allowed a deduction 
                        under section 151 with respect to such 
                        individual for the taxable year,
                            ``(ii) such individual has not attained the 
                        age of 17 as of the close of the calendar year 
                        in which the taxable year of the taxpayer 
                        begins, and
                            ``(iii) such individual bears a 
                        relationship to the taxpayer described in 
                        section 32(c)(3)(B).
                    ``(B) Exception for certain noncitizens.--The term 
                `qualifying child' shall not include any individual who 
                would not be a dependent if the first sentence of 
                section 152(b)(3) were applied without regard to all 
                that follows `resident of the United States'.
            ``(2) Applicable individual.--
                    ``(A) In general.--The term `applicable individual' 
                means, with respect to any taxable year, any individual 
                who has been certified, before the due date for filing 
                the return of tax for the taxable year (without 
                extensions), by a physician (as defined in section 
                1861(r)(1) of the Social Security Act) as being an 
                individual with long-term care needs described in 
                subparagraph (B) for a period--
                            ``(i) which is at least 180 consecutive 
                        days, and
                            ``(ii) a portion of which occurs within the 
                        taxable year.
                Such term shall not include any individual otherwise 
                meeting the requirements of the preceding sentence 
                unless within the 39\1/2\ month period ending on such 
                due date (or such other period as the Secretary 
                prescribes) a physician (as so defined) has certified 
                that such individual meets such requirements.
                    ``(B) Individuals with long-term care needs.--An 
                individual is described in this subparagraph if the 
                individual meets any of the following requirements:
                            ``(i) The individual is at least 6 years of 
                        age and--
                                    ``(I) is unable to perform (without 
                                substantial assistance from another 
                                individual) at least 3 activities of 
                                daily living (as defined in section 
                                7702B(c)(2)(B)) due to a loss of 
                                functional capacity, or
                                    ``(II) requires substantial 
                                supervision to protect such individual 
                                from threats to health and safety due 
                                to severe cognitive impairment and is 
                                unable to perform at least 1 activity 
                                of daily living (as so defined) or to 
                                the extent provided in regulations 
prescribed by the Secretary (in consultation with the Secretary of 
Health and Human Services), is unable to engage in age appropriate 
activities.
                            ``(ii) The individual is at least 2 but not 
                        6 years of age and is unable due to a loss of 
                        functional capacity to perform (without 
                        substantial assistance from another individual) 
                        at least 2 of the following activities: eating, 
                        transferring, or mobility.
                            ``(iii) The individual is under 2 years of 
                        age and requires specific durable medical 
                        equipment by reason of a severe health 
                        condition or requires a skilled practitioner 
                        trained to address the individual's condition 
                        to be available if the individual's parents or 
                        guardians are absent.
            ``(3) Eligible caregiver.--
                    ``(A) In general.--A taxpayer shall be treated as 
                an eligible caregiver for any taxable year with respect 
                to the following individuals:
                            ``(i) The taxpayer.
                            ``(ii) The taxpayer's spouse.
                            ``(iii) An individual with respect to whom 
                        the taxpayer is allowed a deduction under 
                        section 151 for the taxable year.
                            ``(iv) An individual who would be described 
                        in clause (iii) for the taxable year if section 
                        151(c)(1)(A) were applied by substituting for 
                        the exemption amount an amount equal to the sum 
                        of the exemption amount, the standard deduction 
                        under section 63(c)(2)(C), and any additional 
                        standard deduction under section 63(c)(3) which 
                        would be applicable to the individual if clause 
                        (iii) applied.
                            ``(v) An individual who would be described 
                        in clause (iii) for the taxable year if--
                                    ``(I) the requirements of clause 
                                (iv) are met with respect to the 
                                individual, and
                                    ``(II) the requirements of 
                                subparagraph (B) are met with respect 
                                to the individual in lieu of the 
                                support test of section 152(a).
                    ``(B) Residency test.--The requirements of this 
                subparagraph are met if an individual has as his 
                principal place of abode the home of the taxpayer and--
                            ``(i) in the case of an individual who is 
                        an ancestor or descendant of the taxpayer or 
                        the taxpayer's spouse, is a member of the 
                        taxpayer's household for over half the taxable 
                        year, or
                            ``(ii) in the case of any other individual, 
                        is a member of the taxpayer's household for the 
                        entire taxable year.
                    ``(C) Special rules where more than 1 eligible 
                caregiver.--
                            ``(i) In general.--If more than 1 
                        individual is an eligible caregiver with 
                        respect to the same applicable individual for 
                        taxable years ending with or within the same 
                        calendar year, a taxpayer shall be treated as 
                        the eligible caregiver if each such individual 
                        (other than the taxpayer) files a written 
                        declaration (in such form and manner as the 
                        Secretary may prescribe) that such individual 
                        will not claim such applicable individual for 
                        the credit under this section.
                            ``(ii) No agreement.--If each individual 
                        required under clause (i) to file a written 
                        declaration under clause (i) does not do so, 
                        the individual with the highest modified 
                        adjusted gross income (as defined in section 
                        32(c)(5)) shall be treated as the eligible 
                        caregiver.
                            ``(iii) Married individuals filing 
                        separately.--In the case of married individuals 
                        filing separately, the determination under this 
                        subparagraph as to whether the husband or wife 
                        is the eligible caregiver shall be made under 
                        the rules of clause (ii) (whether or not one of 
                        them has filed a written declaration under 
                        clause (i)).''.
    (c) Identification Requirements.--
            (1) In general.--Section 24(e) is amended by adding at the 
        end the following new sentence: ``No credit shall be allowed 
        under this section to a taxpayer with respect to any applicable 
        individual unless the taxpayer includes the name and taxpayer 
        identification number of such individual, and the 
        identification number of the physician certifying such 
        individual, on the return of tax for the taxable year.''.
            (2) Assessment.--Section 6213(g)(2)(I) is amended--
                    (A) by inserting ``or physician identification'' 
                after ``correct TIN'', and
                    (B) by striking ``child'' and inserting ``family 
                care''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

               TITLE VI--TAX RELIEF FOR WORKING FAMILIES

SEC. 601. INCREASED EARNED INCOME TAX CREDIT FOR 2 OR MORE QUALIFYING 
              CHILDREN.

    (a) In General.--The table in section 32(b)(1)(A) (relating to 
percentages) is amended--
            (1) in the second item--
                    (A) by striking ``or more'', and
                    (B) by striking ``21.06'' and inserting ``19.06'', 
                and
            (2) by inserting after the second item the following new 
        item:


 
 
 
``3 or more qualifying children  45                         19.06''
 

      
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

SEC. 602. SIMPLIFICATION OF DEFINITION OF EARNED INCOME.

    (a) In General.--Section 32(c)(2)(A)(i) (defining earned income) is 
amended by inserting ``, but only if such amounts are includible in 
gross income for the taxable year'' after ``other employee 
compensation''.
    (b) Conforming Amendment.--Section 32(c)(2)(B) is amended by 
striking ``and'' at the end of clause (iv), by striking the period at 
the end of clause (v) and inserting ``, and'', and by adding at the end 
the following new clause:
                            ``(vi) the requirement under subparagraph 
                        (A)(i) that an amount be includible in gross 
                        income shall not apply if such amount is exempt 
                        from tax under section 7873 or is derived 
                        directly from restricted and allotted land 
                        under the Act of February 8, 1887 (commonly 
                        known as the Indian General Allotment Act) (25 
                        U.S.C. 331 et seq.) or from land held under 
                        Acts or treaties containing an exception 
                        provision similar to the Indian General 
                        Allotment Act.''.
    (c) Effective Date.--The amendment made by this section shall apply 
to amounts received in taxable years beginning after December 31, 2001.

SEC. 603. SIMPLIFICATION OF DEFINITION OF CHILD DEPENDENT.

    (a) Removal of Support Test for Certain Individuals.--Section 
152(a) (relating to definition of dependent) is amended to read as 
follows:
    ``(a) General Definition.--For purposes of this subtitle--
            ``(1) Dependent.--The term `dependent' means--
                    ``(A) any individual described in paragraph (2) 
                over half of whose support, for the calendar year in 
                which the taxable year of the taxpayer begins, was 
                received from the taxpayer (or is treated under 
                subsection (c) as received from the taxpayer), or
                    ``(B) any individual described in subsection (f).
            ``(2) Individuals.--An individual is described in this 
        paragraph if such individual is--
                    ``(A) a brother, sister, stepbrother, or stepsister 
                of the taxpayer,
                    ``(B) the father or mother of the taxpayer, or an 
                ancestor of either,
                    ``(C) a stepfather or stepmother of the taxpayer,
                    ``(D) a son or daughter of a brother or sister of 
                the taxpayer,
                    ``(E) a brother or sister of the father or mother 
                of the taxpayer,
                    ``(F) a son-in-law, daughter-in-law, father-in-law, 
                mother-in-law, brother-in-law, or sister-in-law of the 
                taxpayer, or
                    ``(G) an individual (other than an individual who 
                at any time during the taxable year was the spouse, 
                determined without regard to section 7703, of the 
                taxpayer) who, for the taxable year of the taxpayer, 
                has as their principal place of abode the home of the 
                taxpayer and is a member of the taxpayer's 
                household.''.
    (b) Other Modifications.--Section 152 is amended by adding at the 
end the following new subsection:
    ``(f) Subsection (f) Dependents.--
            ``(1) In general.--An individual is described in this 
        subsection for the taxable year if such individual--
                    ``(A) bears a relationship to the taxpayer 
                described in paragraph (2),
                    ``(B) except in the case of an eligible foster 
                child or as provided in subsection (e), has the same 
                principal place of abode as the taxpayer for more than 
                one-half of such taxable year, and
                    ``(C)(i) has not attained the age of 19 at the 
                close of the calendar year in which the taxable year 
                begins, or
                    ``(ii) is a student (within the meaning of section 
                151(c)(4)) who has not attained the age of 24 at the 
                close of such calendar year.
            ``(2) Relationship test.--An individual bears a 
        relationship to the taxpayer described in this paragraph if 
        such individual is--
                    ``(A) a son or daughter of the taxpayer, or a 
                descendant of either, or
                    ``(B) a stepson or stepdaughter of the taxpayer.
            ``(3) Special rules.--
                    ``(A) 2 or more claiming dependent.--Except as 
                provided in subparagraph (B), if an individual may be 
                claimed as a dependent by 2 or more taxpayers (but for 
                this subparagraph) for a taxable year beginning in the 
                same calendar year, only the taxpayer with the highest 
                adjusted gross income for such taxable year shall be 
                allowed the deduction with respect to such individual.
                    ``(B) Release of claim to exemption.--Subparagraph 
                (A) shall not apply with respect to an individual if--
                            ``(i) the taxpayer with the highest 
                        adjusted gross income under subparagraph (A), 
                        for any calendar year signs a written 
                        declaration (in such manner and form as the 
                        Secretary may by regulations prescribe) that 
                        such taxpayer will not claim such individual as 
                        a dependent for any taxable year beginning in 
                        such calendar year,
                            ``(ii) the other taxpayer provides over 
                        half of such individual's support for the 
                        calendar year in which the taxable year of such 
                        other taxpayer begins, and
                            ``(iii) such other taxpayer attaches such 
                        written declaration to such taxpayer's return 
                        for the taxable year beginning during such 
                        calendar year.''.
    (c) Rules Relating to Foster Child.--Section 152(b)(2) (relating to 
rules relating to general definition) is amended by striking ``a foster 
child'' and all that follows through ``individual)'' and inserting ``an 
eligible foster child (as defined in section 32(c)(3)(B)(iii)) of an 
individual''.
    (d) Exemption From Gross Income Test.--Section 151(c)(3) (relating 
to definition of child) is amended by striking ``or stepdaughter'' and 
inserting ``stepdaughter, or a descendant of such individual''.
    (e) Waiver of Deduction for Divorced Parents.--
            (1) In general.--So much of section 152(e) as precedes 
        paragraph (4) (relating to support test in case of child of 
        divorced parents, etc.) is amended to read as follows:
    ``(e) Special Rules for Child of Divorced Parents.--
            ``(1) Release of claim to exemption.--In the case of a 
        child (as defined in section 151(c)(3)) of parents--
                    ``(A) who are divorced or legally separated under a 
                decree of divorce or separate maintenance,
                    ``(B) who are separated under a written separation 
                agreement, or
                    ``(C) who live apart at all times during the last 6 
                months of the calendar year,
        the custodial parent who is entitled to the deduction under 
        section 151 for a taxable year with respect to such child may 
        release such deduction to the noncustodial parent.
            ``(2) Procedure.--The noncustodial parent may claim a child 
        described in paragraph (1) as a dependent for the taxable year 
        if--
                    ``(A) the custodial parent signs a written 
                declaration (in such manner and form as the Secretary 
                may by regulations prescribe) that such custodial 
                parent will not claim such child as a dependent for any 
                taxable year beginning in such calendar year,
                    ``(B) the custodial parent and the noncustodial 
                parent provide over half of such child's support for 
                the calendar year in which the taxable years of such 
                parents begin, and
                    ``(C) the noncustodial parent attaches such written 
                declaration to such noncustodial parent's return for 
                the taxable year beginning during such calendar year.
            ``(3) Definitions.--For purposes of this subsection--
                    ``(A) Custodial parent.--The term `custodial 
                parent' means, with regard to an individual, a parent 
                who has custody of such individual for a greater 
                portion of the calendar year than the noncustodial 
                parent.
                    ``(B) Noncustodial parent.--The term `noncustodial 
                parent' means the parent who is not the custodial 
                parent.''.
            (2) Pre-1985 instruments.--Section 152(e)(4)(A) is amended 
        by striking ``A child'' and all that follows through 
        ``noncustodial parent'' and inserting ``A noncustodial parent 
        described in paragraph (1) shall be entitled to the deduction 
        under section 151 for a taxable year with respect to a child 
        if''.
    (f) Conforming Amendments.--
            (1) Section 1(g)(5)(A) is amended by inserting ``as in 
        effect on the day before the date of the enactment of the 
        Working Family Tax Relief Act of 2001'' after ``152(e)''.
            (2) Section 2(b)(1)(A)(i) is amended by striking 
        ``paragraph (2) or (4) of''.
            (3) Section 2(b)(3)(B)(i) is amended by striking 
        ``paragraph (9)'' and inserting ``paragraph (2)(G)''.
            (4) Section 21(e)(5)(A) is amended by striking ``paragraph 
        (2) or (4) of''.
            (5) Section 21(e)(5) is amended in the matter following 
        subclause (B) by inserting ``as in effect on the day before the 
        date of the enactment of the Working Family Tax Relief Act of 
        2001'' after ``152(e)(1)''.
            (6) Section 32(c)(1)(G) is amended by striking ``(3)(D).'' 
        and inserting ``(1)(C). An individual whose qualifying child or 
        qualifying children are not taken into account under subsection 
        (b) solely by reason of paragraph (3)(D) shall be treated as an 
        eligible individual if such individual otherwise meets the 
        requirements of subparagraph (A)(ii).''.
            (7) Section 32(c)(3)(B)(ii) is amended by striking 
        ``paragraph (2) or (4) of''.
            (8) Section 51(i)(1)(C) is amended by striking 
        ``152(a)(9)'' and inserting ``152(a)(2)(G)''.
            (9) Section 152(b) is amended by striking ``specified in 
        subsection (a)'' and inserting ``specified in subsection (a)(2) 
        or (f)(2)''.
            (10) Section 152(c) is amended by striking ``(a)'' and 
        inserting ``(a)(1)''.
            (11) Section 7703(b)(1) is amended by striking ``paragraph 
        (2) or (4) of''.
            (12) The following provisions of are each amended by 
        striking ``paragraphs (1) through (8) of section 152(a)'' and 
        inserting ``subparagraphs (A) through (F) of subsection (a)(2) 
        or subsection (f)(2) of section 152'':
                    (A) Section 170(g)(3).
                    (B) Subparagraphs (A) and (B) of section 51(i)(1).
                    (C) The second sentence of section 213(d)(11).
                    (D) Section 529(e)(2)(B).
                    (E) Section 7702B(f)(2)(C)(iii).
    (g) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

SEC. 604. OTHER MODIFICATIONS TO EARNED INCOME TAX CREDIT.

    (a) Modification of Joint Return Requirement.--Subsection (d) of 
section 32 is amended to read as follows:
    ``(d) Married Individuals.--
            ``(1) In general.--If the taxpayer is married at the close 
        of the taxable year, the credit shall be allowed under 
        subsection (a) only if the taxpayer and his spouse file a joint 
        return for the taxable year.
            ``(2) Marital status.--For purposes of paragraph (1), an 
        individual legally separated from his spouse under a decree of 
divorce or of separate maintenance shall not be considered as married.
            ``(3) Certain married individuals living apart.--For 
        purposes of paragraph (1), if--
                    ``(A) an individual --
                            ``(i) is married and files a separate 
                        return, and
                            ``(ii) has a qualifying child who is a son, 
                        daughter, stepson, or stepdaughter of such 
                        individual, and
                    ``(B) during the last 6 months of such taxable 
                year, such individual and such individual's spouse do 
                not have the same principal place of abode,
        such individual shall not be considered as married.''.
    (b) Modification of Rule Where There Are 2 or More Eligible 
Individuals.--Subparagraph (C) of section 32(c)(1) is amended to read 
as follows:
                    ``(C) 2 or more eligible individuals.--
                            ``(i) In general.--Except as provided in 
                        clause (ii), if 2 or more individuals would 
                        (but for this subparagraph and after 
                        application of subparagraph (B)) be treated as 
                        eligible individuals with respect to the same 
                        qualifying child for taxable years beginning in 
                        the same calendar year, only the individual 
                        with the highest modified adjusted gross income 
                        for such taxable years shall be treated as an 
                        eligible individual with respect to such 
                        qualifying child.
                            ``(ii) Exception for certain parents.--An 
                        otherwise eligible individual who is not 
                        treated under clause (i) as the only eligible 
                        individual with respect to any qualifying child 
                        shall be treated as an eligible individual with 
                        respect to such child if--
                                    ``(I) such child is the son, 
                                daughter, stepson, or stepdaughter of 
                                such individual,
                                    ``(II) such child is not taken into 
                                account under subsection (b) by any 
                                other individual, and
                                    ``(III) the limitation under 
                                subsection (a)(2) for the individual 
                                who would (but for this clause) be 
                                treated under clause (i) as the only 
                                eligible individual with respect to 
                                such child would be greater than zero 
                                (determined as if such individual had 2 
                                qualifying children).''.
    (c) Expansion of Mathematical Error Authority.--Paragraph (2) of 
section 6213(g) is amended by striking ``and'' at the end of 
subparagraph (K), by striking the period at the end of subparagraph (L) 
and inserting ``, and'', and by inserting after subparagraph (L) the 
following new subparagraph:
                    ``(M) the entry on the return claiming the credit 
                under section 32 with respect to a child if, according 
                to the Federal Case Registry of Child Support Orders 
                established under section 453(h) of the Social Security 
                Act, the taxpayer is a noncustodial parent of such 
                child.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

          TITLE VII--TAX RELIEF FOR SELF-EMPLOYED INDIVIDUALS

SEC. 701. DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-EMPLOYED 
              INDIVIDUALS INCREASED.

    (a) In General.--Section 162(l)(1) (relating to special rules for 
health insurance costs of self-employed individuals) is amended to read 
as follows:
            ``(1) Allowance of deduction.--In the case of an individual 
        who is an employee within the meaning of section 401(c)(1), 
        there shall be allowed as a deduction under this section an 
        amount equal to the amount paid during the taxable year for 
        insurance which constitutes medical care for the taxpayer, the 
        taxpayer's spouse, and dependents.''.
    (b) Clarification of Limitations on Other Coverage.--The first 
sentence of section 162(l)(2)(B) is amended to read as follows: 
``Paragraph (1) shall not apply to any taxpayer for any calendar month 
for which the taxpayer participates in any subsidized health plan 
maintained by any employer (other than an employer described in section 
401(c)(4)) of the taxpayer or the spouse of the taxpayer.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.

       TITLE VIII--TAX RELIEF FOR EXPANDING PENSION AVAILABILITY

SEC. 801. NONREFUNDABLE CREDIT TO CERTAIN INDIVIDUALS FOR ELECTIVE 
              DEFERRALS AND IRA CONTRIBUTIONS.

    (a) In General.--Subpart A of part IV of subchapter A of chapter 1 
(relating to nonrefundable personal credits), as amended by section 
302(a), is amended by inserting after section 25B the following new 
section:

``SEC. 25C. ELECTIVE DEFERRALS AND IRA CONTRIBUTIONS BY CERTAIN 
              INDIVIDUALS.

    ``(a) Allowance of Credit.--In the case of an eligible individual, 
there shall be allowed as a credit against the tax imposed by this 
subtitle for the taxable year an amount equal to the applicable 
percentage of so much of the qualified retirement savings contributions 
of the eligible individual for the taxable year as do not exceed 
$2,000.
    ``(b) Applicable Percentage.--For purposes of this section, the 
applicable percentage is the percentage determined in accordance with 
the following table:


------------------------------------------------------------------------
                    Adjusted Gross Income
-------------------------------------------------------------
    Joint return           Head of a        All other cases   Applicable
---------------------      household     -------------------- percentage
                     --------------------
   Over     Not over    Over    Not over    Over    Not over
------------------------------------------------------------------------
$0         $35,000    $0        $26,250   $0        $17,500          50
 35,000     40,000     26,250    30,000    17,500    20,000          40
 40,000     45,000     30,000    33,750    20,000    22,500          30
 45,000     50,000     33,750    37,500    22,500    25,000          15
------------------------------------------------------------------------

    ``(c) Eligible Individual.--For purposes of this section--
            ``(1) In general.--The term `eligible individual' means any 
        individual if such individual has attained the age of 18 as of 
        the close of the taxable year.
            ``(2) Dependents and full-time students not eligible.--The 
        term `eligible individual' shall not include--
                    ``(A) any individual with respect to whom a 
                deduction under section 151 is allowed to another 
                taxpayer for a taxable year beginning in the calendar 
                year in which such individual's taxable year begins, 
                and
                    ``(B) any individual who is a student (as defined 
                in section 151(c)(4)).
    ``(d) Qualified Retirement Savings Contributions.--For purposes of 
this section--
            ``(1) In general.--The term `qualified retirement savings 
        contributions' means, with respect to any taxable year, the sum 
        of--
                    ``(A) the amount of the qualified retirement 
                contributions (as defined in section 219(e)) made by 
                the eligible individual,
                    ``(B) the amount of--
                            ``(i) any elective deferrals (as defined in 
                        section 402(g)(3)) of such individual, and
                            ``(ii) any elective deferral of 
                        compensation by such individual under an 
                        eligible deferred compensation plan (as defined 
                        in section 457(b)) of an eligible employer 
                        described in section 457(e)(1)(A), and
                    ``(C) the amount of voluntary employee 
                contributions by such individual to any qualified 
                retirement plan (as defined in section 4974(c)).
            ``(2) Reduction for certain distributions.--
                    ``(A) In general.--The qualified retirement savings 
                contributions determined under paragraph (1) shall be 
                reduced (but not below zero) by the sum of--
                            ``(i) any distribution from a qualified 
                        retirement plan (as defined in section 
                        4974(c)), or from an eligible deferred 
                        compensation plan (as defined in section 
                        457(b)), received by the individual during the 
                        testing period which is includible in gross 
                        income, and
                            ``(ii) any distribution from a Roth IRA 
                        received by the individual during the testing 
                        period which is not a qualified rollover 
                        contribution (as defined in section 408A(e)) to 
                        a Roth IRA.
                    ``(B) Testing period.--For purposes of subparagraph 
                (A), the testing period, with respect to a taxable 
                year, is the period which includes--
                            ``(i) such taxable year,
                            ``(ii) the 2 preceding taxable years, and
                            ``(iii) the period after such taxable year 
                        and before the due date (including extensions) 
                        for filing the return of tax for such taxable 
                        year.
                    ``(C) Excepted distributions.--There shall not be 
                taken into account under subparagraph (A)--
                            ``(i) any distribution referred to in 
                        section 72(p), 401(k)(8), 401(m)(6), 402(g)(2), 
                        404(k), or 408(d)(4), and
                            ``(ii) any distribution to which section 
                        408A(d)(3) applies.
                    ``(D) Treatment of distributions received by spouse 
                of individual.--For purposes of determining 
                distributions received by an individual under 
                subparagraph (A) for any taxable year, any distribution 
                received by the spouse of such individual shall be 
                treated as received by such individual if such 
                individual and spouse file a joint return for such 
                taxable year and for the taxable year during which the 
                spouse receives the distribution.
    ``(e) Adjusted Gross Income.--For purposes of this section, 
adjusted gross income shall be determined without regard to sections 
911, 931, and 933.
    ``(f) Investment in the Contract.--Notwithstanding any other 
provision of law, a qualified retirement savings contribution shall not 
fail to be included in determining the investment in the contract for 
purposes of section 72 by reason of the credit under this section.''.
    (b) Credit Allowed Against Regular Tax and Alternative Minimum 
Tax.--
            (1) In general.--Subsection (a) of section 26 is amended by 
        inserting ``(other than the credit allowed by section 25C)'' 
        after ``credits allowed by this subpart''.
            (2) Conforming amendment.--Section 25C, as added by 
        subsection (a), is amended by inserting after subsection (f) 
        the following new subsection:
    ``(g) Limitation Based on Amount of Tax.--The aggregate credit 
allowed by this section for the taxable year shall not exceed the sum 
of--
            ``(1) the taxpayer's regular tax liability for the taxable 
        year reduced by the sum of the credits allowed by sections 21, 
        22, 23, 24, 25, 25A, and 25B, plus
            ``(2) the tax imposed by section 55 for such taxable 
        year.''.
    (c) Annual Report.--The Comptroller General of the United States 
shall submit a report annually to the Committee on Ways and Means of 
the House of Representatives and the Committee on Finance of the Senate 
regarding the number of taxpayers receiving the credit allowed under 
section 25C of the Internal Revenue Code of 1986, as added by 
subsection (a).
    (d) Conforming Amendment.--The table of sections for subpart A of 
part IV of subchapter A of chapter 1, as amended by section 302(b), is 
amended by inserting after the item relating to section 25B the 
following new item:

                              ``Sec. 25C. Elective deferrals and IRA 
                                        contributions by certain 
                                        individuals.''.

    (e) Effective Dates.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

SEC. 802. CREDIT FOR QUALIFIED PENSION PLAN CONTRIBUTIONS OF SMALL 
              EMPLOYERS.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
(relating to business related credits), as amended by section 411(a), 
is amended by adding at the end the following new section:

``SEC. 45F. SMALL EMPLOYER PENSION PLAN CONTRIBUTIONS.

    ``(a) General Rule.--For purposes of section 38, in the case of an 
eligible employer, the small employer pension plan contribution credit 
determined under this section for any taxable year is an amount equal 
to 50 percent of the amount which would (but for subsection (f)(1)) be 
allowed as a deduction under section 404 for such taxable year for 
qualified employer contributions made to any qualified retirement plan 
on behalf of any employee who is not a highly compensated employee.
    ``(b) Credit Limited to 3 Years.--The credit allowable by this 
section shall be allowed only with respect to the period of 3 taxable 
years beginning with the first taxable year for which a credit is 
allowable with respect to a plan under this section.
    ``(c) Qualified Employer Contribution.--For purposes of this 
section--
            ``(1) Defined contribution plans.--In the case of a defined 
        contribution plan, the term `qualified employer contribution' 
        means the amount of nonelective and matching contributions to 
        the plan made by the employer on behalf of any employee who is 
        not a highly compensated employee to the extent such amount 
        does not exceed 3 percent of such employee's compensation from 
        the employer for the year.
            ``(2) Defined benefit plans.--In the case of a defined 
        benefit plan, the term `qualified employer contribution' means 
        the amount of employer contributions to the plan made on behalf 
        of any employee who is not a highly compensated employee to the 
        extent that the accrued benefit of such employee derived from 
        employer contributions for the year does not exceed the 
        equivalent (as determined under regulations prescribed by the 
        Secretary and without regard to contributions and benefits 
        under the Social Security Act) of 3 percent of such employee's 
        compensation from the employer for the year.
    ``(d) Qualified Retirement Plan.--
            ``(1) In general.--The term `qualified retirement plan' 
        means any plan described in section 401(a) which includes a 
        trust exempt from tax under section 501(a) if the plan meets--
                    ``(A) the contribution requirements of paragraph 
                (2),
                    ``(B) the vesting requirements of paragraph (3), 
                and
                    ``(C) the distributions requirements of paragraph 
                (4).
            ``(2) Contribution requirements.--
                    ``(A) In general.--The requirements of this 
                paragraph are met if, under the plan--
                            ``(i) the employer is required to make 
                        nonelective contributions of at least 1 percent 
                        of compensation (or the equivalent thereof in 
                        the case of a defined benefit plan) for each 
                        employee who is not a highly compensated 
                        employee who is eligible to participate in the 
                        plan, and
                            ``(ii) allocations of nonelective employer 
                        contributions are either in equal dollar 
                        amounts for all employees covered by the plan 
                        or bear a uniform relationship to the total 
                        compensation, or the basic or regular rate of 
                        compensation, of the employees covered by the 
                        plan.
                    ``(B) Compensation limitation.--The compensation 
                taken into account under subparagraph (A) for any year 
                shall not exceed the limitation in effect for such year 
                under section 401(a)(17).
            ``(3) Vesting requirements.--The requirements of this 
        paragraph are met if the plan satisfies the requirements of 
        subparagraph (A) or (B).
                    ``(A) 3-year vesting.--A plan satisfies the 
                requirements of this subparagraph if an employee who 
                has completed at least 3 years of service has a 
                nonforfeitable right to 100 percent of the employee's 
                accrued benefit derived from employer contributions.
                    ``(B) 5-year graded vesting.--A plan satisfies the 
                requirements of this subparagraph if an employee has a 
                nonforfeitable right to a percentage of the employee's 
                accrued benefit derived from employer contributions 
                determined under the following table:

                                                     The nonforfeitable
``Years of service:                                      percentage is:
    1.............................................                  20 
    2.............................................                  40 
    3.............................................                  60 
    4.............................................                  80 
    5.............................................                 100.
            ``(4) Distribution requirements.--In the case of a profit-
        sharing or stock bonus plan, the requirements of this paragraph 
        are met if, under the plan, qualified employer contributions 
        are distributable only as provided in section 401(k)(2)(B).
    ``(e) Other Definitions.--For purposes of this section--
            ``(1) Eligible employer.--
                    ``(A) In general.--The term `eligible employer' 
                means, with respect to any year, an employer which has 
                no more than 50 employees who received at least $5,000 
                of compensation from the employer for the preceding 
                year.
                    ``(B) Requirement for new qualified employer 
                plans.--Such term shall not include an employer if, 
                during the 3-taxable year period immediately preceding 
                the 1st taxable year for which the credit under this 
                section is otherwise allowable for a qualified employer 
                plan of the employer, the employer or any member of any 
                controlled group including the employer (or any 
                predecessor of either) established or maintained a 
                qualified employer plan with respect to which 
                contributions were made, or benefits were accrued, for 
                substantially the same employees as are in the 
qualified employer plan.
            ``(2) Highly compensated employee.--The term `highly 
        compensated employee' has the meaning given such term by 
        section 414(q) (determined without regard to section 
        414(q)(1)(B)(ii)).
    ``(f) Special Rules.--
            ``(1) Disallowance of deduction.--No deduction shall be 
        allowed for that portion of the qualified employer 
        contributions paid or incurred for the taxable year which is 
        equal to the credit determined under subsection (a).
            ``(2) Election not to claim credit.--This section shall not 
        apply to a taxpayer for any taxable year if such taxpayer 
        elects to have this section not apply for such taxable year.
            ``(3) Aggregation rules.--All persons treated as a single 
        employer under subsection (a) or (b) of section 52, or 
        subsection (n) or (o) of section 414, shall be treated as one 
        person. All eligible employer plans shall be treated as 1 
        eligible employer plan.
    ``(g) Recapture of Credit on Forfeited Contributions.--
            ``(1) In general.--Except as provided in paragraph (2), if 
        any accrued benefit which is forfeitable by reason of 
        subsection (d)(3) is forfeited, the employer's tax imposed by 
        this chapter for the taxable year in which the forfeiture 
        occurs shall be increased by 35 percent of the employer 
        contributions from which such benefit is derived to the extent 
        such contributions were taken into account in determining the 
        credit under this section.
            ``(2) Reallocated contributions.--Paragraph (1) shall not 
        apply to any contribution which is reallocated by the employer 
        under the plan to employees who are not highly compensated 
        employees.''.
    (b) Credit Allowed as Part of General Business Credit.--Section 
38(b) (defining current year business credit), as amended by section 
411(b)(1), is amended by striking ``plus'' at the end of paragraph 
(13), by striking the period at the end of paragraph (14) and inserting 
``, plus'', and by adding at the end the following new paragraph:
            ``(15) in the case of an eligible employer (as defined in 
        section 45F(e)), the small employer pension plan contribution 
        credit determined under section 45F(a).''.
    (c) Conforming Amendments.--
            (1) Section 39(d), as amended by section 411(b)(2), is 
        amended by adding at the end the following new paragraph:
            ``(11) No carryback of small employer pension plan 
        contribution credit before january 1, 2002.--No portion of the 
        unused business credit for any taxable year which is 
        attributable to the small employer pension plan contribution 
        credit determined under section 45F may be carried back to a 
        taxable year beginning before January 1, 2002.''.
            (2) Subsection (c) of section 196, as amended by section 
        411(b)(3), is amended by striking ``and'' at the end of 
        paragraph (9), by striking the period at the end of paragraph 
        (10) and inserting ``, and'', and by adding at the end the 
        following new paragraph:
            ``(11) the small employer pension plan contribution credit 
        determined under section 45F(a).''.
            (3) The table of sections for subpart D of part IV of 
        subchapter A of chapter 1, as amended by section 411(b)(4), is 
        amended by adding at the end the following new item:

                              ``Sec. 45F. Small employer pension plan 
                                        contributions.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to contributions paid or incurred in taxable years beginning 
after December 31, 2001.

SEC. 803. CREDIT FOR PENSION PLAN STARTUP COSTS OF SMALL EMPLOYERS.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
(relating to business related credits), as amended by section 802(a), 
is amended by adding at the end the following new section:

``SEC. 45G. SMALL EMPLOYER PENSION PLAN STARTUP COSTS.

    ``(a) General Rule.--For purposes of section 38, in the case of an 
eligible employer, the small employer pension plan startup cost credit 
determined under this section for any taxable year is an amount equal 
to 50 percent of the qualified startup costs paid or incurred by the 
taxpayer during the taxable year.
    ``(b) Dollar Limitation.--The amount of the credit determined under 
this section for any taxable year shall not exceed--
            ``(1) $500 for the first credit year and each of the 2 
        taxable years immediately following the first credit year, and
            ``(2) zero for any other taxable year.
    ``(c) Eligible Employer.--For purposes of this section--
            ``(1) In general.--The term `eligible employer' has the 
        meaning given such term by section 408(p)(2)(C)(i).
            ``(2) Requirement for new qualified employer plans.--Such 
        term shall not include an employer if, during the 3-taxable 
        year period immediately preceding the 1st taxable year for 
        which the credit under this section is otherwise allowable for 
        a qualified employer plan of the employer, the employer or any 
        member of any controlled group including the employer (or any 
        predecessor of either) established or maintained a qualified 
        employer plan with respect to which contributions were made, or 
        benefits were accrued, for substantially the same employees as 
        are in the qualified employer plan.
    ``(d) Other Definitions.--For purposes of this section--
            ``(1) Qualified startup costs.--
                    ``(A) In general.--The term `qualified startup 
                costs' means any ordinary and necessary expenses of an 
                eligible employer which are paid or incurred in 
                connection with--
                            ``(i) the establishment or administration 
                        of an eligible employer plan, or
                            ``(ii) the retirement-related education of 
                        employees with respect to such plan.
                    ``(B) Plan must have at least 1 participant.--Such 
                term shall not include any expense in connection with a 
                plan that does not have at least 1 employee eligible to 
                participate who is not a highly compensated employee.
            ``(2) Eligible employer plan.--The term `eligible employer 
        plan' means a qualified employer plan within the meaning of 
        section 4972(d).
            ``(3) First credit year.--The term `first credit year' 
        means--
                    ``(A) the taxable year which includes the date that 
                the eligible employer plan to which such costs relate 
                becomes effective, or
                    ``(B) at the election of the eligible employer, the 
                taxable year preceding the taxable year referred to in 
                subparagraph (A).
    ``(e) Special Rules.--For purposes of this section--
            ``(1) Aggregation rules.--All persons treated as a single 
        employer under subsection (a) or (b) of section 52, or 
        subsection (n) or (o) of section 414, shall be treated as one 
        person. All eligible employer plans shall be treated as 1 
        eligible employer plan.
            ``(2) Disallowance of deduction.--No deduction shall be 
        allowed for that portion of the qualified startup costs paid or 
        incurred for the taxable year which is equal to the credit 
        determined under subsection (a).
            ``(3) Election not to claim credit.--This section shall not 
        apply to a taxpayer for any taxable year if such taxpayer 
        elects to have this section not apply for such taxable year.''.
    (b) Credit Allowed as Part of General Business Credit.--Section 
38(b) (defining current year business credit), as amended by section 
802(b), is amended by striking ``plus'' at the end of paragraph (14), 
by striking the period at the end of paragraph (15) and inserting ``, 
plus'', and by adding at the end the following new paragraph:
            ``(16) in the case of an eligible employer (as defined in 
        section 45G(c)), the small employer pension plan startup cost 
        credit determined under section 45G(a).''.
    (c) Conforming Amendments.--
            (1) Section 39(d), as amended by section 802(c)(1), is 
        amended by adding at the end the following new paragraph:
            ``(12) No carryback of small employer pension plan startup 
        cost credit before january 1, 2002.--No portion of the unused 
        business credit for any taxable year which is attributable to 
        the small employer pension plan startup cost credit determined 
        under section 45G may be carried back to a taxable year 
        beginning before January 1, 2002.''.
            (2) Subsection (c) of section 196, as amended by section 
        802(c)(2), is amended by striking ``and'' at the end of 
        paragraph (10), by striking the period at the end of paragraph 
        (11) and inserting ``, and'', and by adding at the end the 
        following new paragraph:
            ``(12) the small employer pension plan startup cost credit 
        determined under section 45G(a).''.
            (3) The table of sections for subpart D of part IV of 
        subchapter A of chapter 1, as amended by section 802(c)(3), is 
        amended by adding at the end the following new item:

                              ``Sec. 45G. Small employer pension plan 
                                        startup costs.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to costs paid or incurred in taxable years beginning after 
December 31, 2001, with respect to qualified employer plans established 
after such date.

               TITLE IX--TAX RELIEF FOR ADOPTIVE PARENTS

SEC. 901. EXPANSION OF ADOPTION CREDIT.

    (a) In General.--
            (1) Adoption credit.--Section 23(a)(1) (relating to 
        allowance of credit) is amended to read as follows:
            ``(1) In general.--In the case of an individual, there 
        shall be allowed as a credit against the tax imposed by this 
        chapter--
                    ``(A) in the case of an adoption of a child other 
                than a child with special needs, the amount of the 
                qualified adoption expenses paid or incurred by the 
                taxpayer, and
                    ``(B) in the case of an adoption of a child with 
                special needs, $10,000.''.
            (2) Adoption assistance programs.--Section 137(a) (relating 
        to adoption assistance programs) is amended to read as follows:
    ``(a) In General.--Gross income of an employee does not include 
amounts paid or expenses incurred by the employer for adoption expenses 
in connection with the adoption of a child by an employee if such 
amounts are furnished pursuant to an adoption assistance program. The 
amount of the exclusion shall be--
            ``(1) in the case of an adoption of a child other than a 
        child with special needs, the amount of the qualified adoption 
        expenses paid or incurred by the taxpayer, and
            ``(2) in the case of an adoption of a child with special 
        needs, $10,000.''.
    (b) Dollar Limitations.--
            (1) Dollar amount of allowed expenses.--
                    (A) Adoption expenses.--Section 23(b)(1) (relating 
                to allowance of credit) is amended--
                            (i) by striking ``$5,000'' and inserting 
                        ``$10,000'',
                            (ii) by striking ``($6,000, in the case of 
                        a child with special needs)'', and
                            (iii) by striking ``subsection (a)'' and 
                        inserting ``subsection (a)(1)(A)''.
                    (B) Adoption assistance programs.--Section 
                137(b)(1) (relating to dollar limitations for adoption 
                assistance programs) is amended--
                            (i) by striking ``$5,000'' and inserting 
                        ``$10,000'', and
                            (ii) by striking ``($6,000, in the case of 
                        a child with special needs)'', and
                            (iii) by striking ``subsection (a)'' and 
                        inserting ``subsection (a)(1)''.
            (2) Phase-out limitation.--
                    (A) Adoption expenses.--Clause (i) of section 
                23(b)(2)(A) (relating to income limitation) is amended 
                by striking ``$75,000'' and inserting ``$150,000''.
                    (B) Adoption assistance programs.--Section 
                137(b)(2)(A) (relating to income limitation) is amended 
                by striking ``$75,000'' and inserting ``$150,000''.
    (c) Year Credit Allowed.--Section 23(a)(2) is amended by adding at 
the end the following new flush sentence:
        ``In the case of the adoption of a child with special needs, 
        the credit allowed under paragraph (1) shall be allowed for the 
        taxable year in which the adoption becomes final.''.
    (d) Repeal of Sunset Provisions.--
            (1) Children without special needs.--Paragraph (2) of 
        section 23(d) (relating to definition of eligible child) is 
        amended to read as follows:
            ``(2) Eligible child.--The term `eligible child' means any 
        individual who--
                    ``(A) has not attained age 18, or
                    ``(B) is physically or mentally incapable of caring 
                for himself.''.
            (2) Adoption assistance programs.--Section 137 (relating to 
        adoption assistance programs) is amended by striking subsection 
        (f).
    (e) Adjustment of Dollar and Income Limitations for Inflation.--
            (1) Adoption credit.--Section 23 is amended by 
        redesignating subsection (h) as subsection (i) and by inserting 
        after subsection (g) the following new subsection:
    ``(h) Adjustments for Inflation.--In the case of a taxable year 
beginning after December 31, 2002, each of the dollar amounts in 
subsection (a)(1)(B) and paragraphs (1) and (2)(A)(i) of subsection (b) 
shall be increased by an amount equal to--
            ``(1) such dollar amount, multiplied by
            ``(2) the cost-of-living adjustment determined under 
        section 1(f)(3) for the calendar year in which the taxable year 
        begins, determined by substituting `calendar year 2001' for 
        `calendar year 1992' in subparagraph (B) thereof.''.
            (2) Adoption assistance programs.--Section 137, as amended 
        by subsection (d), is amended by adding at the end the 
        following new subsection:
    ``(f) Adjustments for Inflation.--In the case of a taxable year 
beginning after December 31, 2002, each of the dollar amounts in 
subsection (a)(2) and paragraphs (1) and (2)(A) of subsection (b) shall 
be increased by an amount equal to--
            ``(1) such dollar amount, multiplied by
            ``(2) the cost-of-living adjustment determined under 
        section 1(f)(3) for the calendar year in which the taxable year 
        begins, determined by substituting `calendar year 2001' for 
        `calendar year 1992' in subparagraph (B) thereof.''.
    (f) Limitation Based on Amount of Tax.--
            (1) In general.--Subsection (c) of section 23 is amended by 
        striking ``the limitation imposed'' and all that follows 
        through ``1400C)'' and inserting ``the applicable tax 
        limitation''.
            (2) Applicable tax limitation.--Subsection (d) of section 
        23 is amended by adding at the end the following new paragraph:
            ``(4) Applicable tax limitation.--The term `applicable tax 
        limitation' means the sum of--
                    ``(A) the taxpayer's regular tax liability for the 
                taxable year, reduced (but not below zero) by the sum 
                of the credits allowed by sections 21, 22, 24 (other 
                than the amount of the increase under subsection (d) 
                thereof), 25, and 25A, and
                    ``(B) the tax imposed by section 55 for such 
                taxable year.''.
            (3) Conforming amendments.--
                    (A) Subsection (a) of section 26 (relating to 
                limitation based on amount of tax) is amended by 
                inserting ``(other than section 23)'' after ``allowed 
                by this subpart''.
                    (B) Paragraph (1) of section 53(b) (relating to 
                minimum tax credit) is amended by inserting ``reduced 
                by the aggregate amount taken into account under 
                section 23(d)(3)(B) for all such prior taxable years,'' 
                after ``1986,''.
    (g) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.
                                 <all>