Exemption of certain interest income from tax

(a)

In general

Part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to amounts specifically excluded from gross income) is amended by inserting after section 115 the following new section:

116.

Partial exclusion of interest received by individuals

(a)

Exclusion from gross income

Gross income does not include interest otherwise includible in gross income which is received during the taxable year by an individual. (b)

Limitations

(1)

Maximum amount

The aggregate amount excluded under subsection (a) for any taxable year shall not exceed— (A)in the case of any taxable year beginning in 2007, $200 ($400 in the case of a joint return), and (B)in the case of any taxable year beginning after 2007, $400 (twice such amount in the case of a joint return). (2)

Inflation adjustment

In the case of any taxable year beginning after 2008, the $400 amount contained in paragraph (1)(B) shall be increased by an amount equal to— (A)such dollar amount, multiplied by (B)the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting calendar year 2007 for calendar year 1992 in subparagraph (B) thereof.

If any increase under the preceding sentence is not a multiple of $10, such increase shall be rounded to the nearest multiple of $10.

(c)

Interest

For purposes of this section, the term interest means— (1)interest on deposits with a bank (as defined in section 581), (2)amounts (whether or not designated as interest) paid in respect of deposits, investment certificates, or withdrawable or repurchasable shares, by— (A)a mutual savings bank, cooperative bank, domestic building and loan association, industrial loan association or bank, or credit union, or (B)any other savings or thrift institution which is chartered and supervised under Federal or State law,

the deposits or accounts in which are insured under Federal or State law or which are protected and guaranteed under State law.

(d)

Certain Nonresident Aliens Ineligible for Exclusion

For purposes of this section, in the case of a nonresident alien individual, subsection (a) shall apply only in determining the taxes imposed for the taxable year pursuant to sections 871(b)(1) and 877(b).

(b)

Conforming Amendments

(1)Subparagraph (A) of section 32(i)(2) of such Code is amended by inserting (determined without regard to section 116) before the comma. (2)Subparagraph (B) of section 86(b)(2) of such Code is amended to read as follows:

(B)increased by the sum of— (i)the amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax, and (ii)the amount of interest received during the taxable year which is excluded from gross income under section 116.

(3)Subsection (d) of section 135 of such Code is amended by redesignating paragraph (4) as paragraph (5) and by inserting after paragraph (3) the following new paragraph:

(4)

Coordination with section 116

This section shall be applied before section 116.

(4)Paragraph (2) of section 265(a) of such Code is amended by inserting before the period , or to purchase or carry obligations or shares, or to make deposits, to the extent the interest thereon is excludable from gross income under section 116. (5)Subsection (c) of section 584 of such Code is amended by adding at the end the following new flush sentence:

The proportionate share of each participant in the amount of interest received by the common trust fund and to which section 116 applies shall be considered for purposes of such section as having been received by such participant.

(6)Subsection (a) of section 643 of such Code is amended by redesignating paragraph (7) as paragraph (8) and by inserting after paragraph (6) the following new paragraph:

(7)

Interest

There shall be included the amount of any interest excluded from gross income pursuant to section 116.

(7)The table of sections for part III of subchapter B of chapter 1 of such Code is amended by inserting after the item relating to section 115 the following new item:

Sec. 116. Partial exclusion of dividends and interest received by individuals.

(c)

Effective Date

The amendments made by this section shall apply to taxable years beginning after December 31, 2006.