Short title

This Act may be cited as the

Active Duty Military Tax Relief Act of 2007

Credit for income differential for employment of activated military reservist and replacement personnel

(a)

In general

Subpart B of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to foreign tax credit, etc.) is amended by adding at the end the following new section:

30D.

Employer wage credit for activated military reservists

(a)

General rule

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)in the case of an eligible small business employer, the employment credit with respect to all qualified employees and qualified replacement employees of the taxpayer, plus (2)the self-employment credit of a qualified self-employed taxpayer. (b)

Employment credit

For purposes of this section— (1)

Qualified employees

(A)

In general

The employment credit with respect to a qualified employee of the taxpayer for any taxable year is equal to 40 percent of so much of the excess (if any) paid by the taxpayer to such qualified employee of— (i)the qualified employee’s average daily qualified compensation for the taxable year, over (ii)the average daily military pay and allowances received by the qualified employee during the taxable year while participating in qualified reserve component duty to the exclusion of the qualified employee’s normal employment duties,

for the aggregate number of days the qualified employee participates in qualified reserve component duty during the taxable year (including time spent in a travel status) as does not exceed $25,000. The employment credit, with respect to all qualified employees, is equal to the sum of the employment credits for each qualified employee under this subsection.

(B)

Average daily qualified compensation and average daily military pay and allowances

As used with respect to a qualified employee— (i)the term average daily qualified compensation means the qualified compensation of the qualified employee for the taxable year divided by 365, and (ii)the term average daily military pay and allowances means— (I)the amount paid to the qualified employee during the taxable year as military pay and allowances on account of the qualified employee’s participation in qualified reserve component duty, divided by (II)the total number of days the qualified employee participates in qualified reserve component duty, including time spent in travel status. (C)

Qualified compensation

When used with respect to the compensation paid to a qualified employee for any period during which the qualified employee participates in qualified reserve component duty, the term qualified compensation means— (i)compensation which is normally contingent on the qualified employee’s presence for work and which would be deductible from the taxpayer’s gross income under section 162(a)(1) if the qualified employee were present and receiving such compensation, (ii)compensation which is not characterized by the taxpayer as vacation or holiday pay, or as sick leave or pay, or as any other form of pay for a nonspecific leave of absence, and with respect to which the number of days the qualified employee participates in qualified reserve component duty does not result in any reduction in the amount of vacation time, sick leave, or other nonspecific leave previously credited to or earned by the qualified employee, and (iii)group health plan costs (if any) with respect to the qualified employee. (D)

Qualified employee

The term qualified employee means a person who— (i)has been an employee of the taxpayer for the 91-day period immediately preceding the period during which the employee participates in qualified reserve component duty, and (ii)is a member of the Ready Reserve of a reserve component of an Armed Force of the United States as defined in sections 10142 and 10101 of title 10, United States Code. (2)

Qualified replacement employees

(A)

In general

The employment credit with respect to a qualified replacement employee of the taxpayer for any taxable year is equal to 40 percent of so much of the individual’s qualified compensation attributable to service rendered as a qualified replacement employee as does not exceed $15,000. The employment credit, with respect to all qualified replacement employees, is equal to the sum of the employment credits for each qualified replacement employee under this subsection. (B)

Qualified compensation

When used with respect to the compensation paid to a qualified replacement employee, the term qualified compensation means— (i)compensation which is normally contingent on the qualified replacement employee’s presence for work and which is deductible from the taxpayer’s gross income under section 162(a)(1), (ii)compensation which is not characterized by the taxpayer as vacation or holiday pay, or as sick leave or pay, or as any other form of pay for a nonspecific leave of absence, and (iii)group health plan costs (if any) with respect to the qualified replacement employee. (C)

Qualified replacement employee

The term qualified replacement employee means an individual who is hired to replace a qualified employee or a qualified self-employed taxpayer, but only with respect to the period during which such employee or taxpayer participates in qualified reserve component duty, including time spent in travel status, and, in the case of a qualified employee, is receiving qualified compensation (as defined in paragraph (1)(C)) for which an employment credit is allowed as determined under paragraph (1). (c)

Self-Employment credit

For purposes of this section— (1)

In general

The self-employment credit of a qualified self-employed taxpayer for any taxable year is equal to 40 percent of so much of the excess (if any) of— (A)the qualified self-employed taxpayer’s average daily qualified compensation for the taxable year, over (B)the average daily military pay and allowances received by the taxpayer during the taxable year while participating in qualified reserve component duty to the exclusion of the taxpayer’s normal self-employment duties,

for the aggregate number of days the taxpayer participates in qualified reserve component duty during the taxable year (including time spent in a travel status) as does not exceed $25,000.

(2)

Average daily qualified compensation and average daily military pay and allowances

As used with respect to a qualified self-employed taxpayer— (A)the term average daily qualified compensation means the qualified compensation of the qualified self-employed taxpayer for the taxable year divided by 365 days, and (B)the term average daily military pay and allowances means— (i)the amount paid to the taxpayer during the taxable year as military pay and allowances on account of the taxpayer’s participation in qualified reserve component duty, divided by (ii)the total number of days the taxpayer participates in qualified reserve component duty, including time spent in travel status. (3)

Qualified compensation

When used with respect to the compensation paid to a qualified self-employed taxpayer for any period during which the qualified self-employed taxpayer participates in qualified reserve component duty, the term qualified compensation means— (A)the self-employment income (as defined in section 1402(b) of the taxpayer which is normally contingent on the taxpayer's presence for work, (B)compensation which is not characterized by the taxpayer as vacation or holiday pay, or as sick leave or pay, or as any other form of pay for a nonspecific leave of absence, and (C)the amount paid for insurance which constitutes medical care for the taxpayer for such year (within the meaning of section 162(l)). (4)

Qualified self-employed taxpayer

The term qualified self-employed taxpayer means a taxpayer who— (A)has net earnings from self-employment (as defined in section 1402(a)) for the taxable year, and (B)is a member of the Ready Reserve of a reserve component of an Armed Force of the United States. (d)

Coordination with other credits

The amount of credit otherwise allowable under this chapter with respect to compensation paid to any employee shall be reduced by the credit allowed by this section with respect to such employee. (e)

Limitations

(1)

Application with other credits

The credit allowed under subsection (a) for any taxable year shall not exceed the excess (if any) of— (A)the regular tax for the taxable year reduced by the sum of the credits allowable under subpart A and sections 27, 30, 30B, and 30C, over (B)the tentative minimum tax for the taxable year. (2)

Disallowance for failure to comply with employment or reemployment rights of members of the reserve components of the Armed Forces of the United States

No credit shall be allowed under subsection (a) to a taxpayer for— (A)any taxable year, beginning after the date of the enactment of this section, in which the taxpayer is under a final order, judgment, or other process issued or required by a district court of the United States under section 4323 of title 38 of the United States Code with respect to a violation of chapter 43 of such title, and (B)the 2 succeeding taxable years. (3)

Disallowance with respect to persons ordered to active duty for training

No credit shall be allowed under subsection (a) to a taxpayer with respect to any period by taking into account any person who is called or ordered to active duty for any of the following types of duty: (A)Active duty for training under any provision of title 10, United States Code. (B)Training at encampments, maneuvers, outdoor target practice, or other exercises under chapter 5 of title 32, United States Code. (C)Full-time National Guard duty, as defined in section 101(d)(5) of title 10, United States Code. (f)

General definitions and special rules

For purposes of this section— (1)

Eligible small business employer

(A)

In general

The term eligible small business employer means, with respect to any taxable year, any employer which— (i)employed an average of 100 or fewer employees on business days during such taxable year, and (ii)under a written plan of the employer, provides the excess amount described in subsection (b)(1)(A) to every qualified employee of the employer. (B)

Controlled groups

For purposes of subparagraph (A), all persons treated as a single employer under subsection (b), (c), (m), or (o) of section 414 shall be treated as a single employer. (2)

Military pay and allowances

The term military pay means pay as that term is defined in section 101(21) of title 37, United States Code, and the term allowances means the allowances payable to a member of the Armed Forces of the United States under chapter 7 of that title. (3)

Qualified reserve component duty

The term qualified reserve component duty includes only active duty performed, as designated in the reservist’s military orders, in support of a contingency operation as defined in section 101(a)(13) of title 10, United States Code. (4)

Carryback and carryforward allowed

(A)

In general

If the credit allowable under subsection (a) for a taxable year exceeds the amount of the limitation under subsection (f)(1) for such taxable year (in this paragraph referred to as the unused credit year), such excess shall be a credit carryback to the taxable year preceding the unused credit year and a credit carryforward to each of the 20 taxable years following the unused credit year. (B)

Rules

Rules similar to the rules of section 39 shall apply with respect to the credit carryback and credit carryforward under subparagraph (A). (5)

Certain rules to apply

Rules similar to the rules of subsections (c), (d), and (e) of section 52 shall apply.

(b)

No deduction for compensation taken into account for credit

Section 280C(a) of the Internal Revenue Code of 1986 (relating to rule for employment credits) is amended— (1)by inserting or compensation after salaries, and (2)by inserting 30D, before 45A(a),. (c)

Conforming amendment

Section 55(c)(2) of the Internal Revenue Code of 1986 is amended by inserting 30D(e)(1), after 30(b)(3),. (d)

Clerical amendment

The table of sections for subpart B of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end following new item:

Sec. 30D. Employer wage credit for activated military reservists.

(e)

Effective date

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

Differential wage payments

(a)

Income tax withholding on differential wage payments

(1)

In general

Section 3401 of the Internal Revenue Code of 1986 (relating to definitions) is amended by adding at the end the following new subsection:

(h)

Differential wage payments to active duty members of the uniformed services

(1)

In general

For purposes of subsection (a), any differential wage payment shall be treated as a payment of wages by the employer to the employee. (2)

Differential wage payment

For purposes of paragraph (1), the term differential wage payment means any payment which— (A)is made by an employer to an individual with respect to any period during which the individual is performing service in the uniformed services while on active duty for a period of more than 30 days, and (B)represents all or a portion of the wages the individual would have received from the employer if the individual were performing service for the employer.

(2)

Effective date

The amendment made by this subsection shall apply to remuneration paid after December 31, 2007. (b)

Treatment of differential wage payments for retirement plan purposes

(1)

Pension plans

(A)

In general

Section 414(u) of the Internal Revenue Code of 1986 (relating to special rules relating to veterans’ reemployment rights under USERRA) is amended by adding at the end the following new paragraph:

(11)

Treatment of differential wage payments

(A)

In general

Except as provided in this paragraph, for purposes of applying this title to a retirement plan to which this subsection applies— (i)an individual receiving a differential wage payment shall be treated as an employee of the employer making the payment, (ii)the differential wage payment shall be treated as compensation, and (iii)the plan shall not be treated as failing to meet the requirements of any provision described in paragraph (1)(C) by reason of any contribution or benefit which is based on the differential wage payment. (B)

Special rule for distributions

(i)

In general

Notwithstanding subparagraph (A)(i), for purposes of section 401(k)(2)(B)(i)(I), 403(b)(7)(A)(ii), 403(b)(11)(A), or 457(d)(1)(A)(ii), an individual shall be treated as having been severed from employment during any period the individual is performing service in the uniformed services described in section 3401(h)(2)(A). (ii)

Limitation

If an individual elects to receive a distribution by reason of clause (i), the plan shall provide that the individual may not make an elective deferral or employee contribution during the 6-month period beginning on the date of the distribution. (C)

Nondiscrimination requirement

Subparagraph (A)(iii) shall apply only if all employees of an employer (as determined under subsections (b), (c), (m), and (o)) performing service in the uniformed services described in section 3401(h)(2)(A) are entitled to receive differential wage payments on reasonably equivalent terms and, if eligible to participate in a retirement plan maintained by the employer, to make contributions based on the payments on reasonably equivalent terms. For purposes of applying this subparagraph, the provisions of paragraphs (3), (4), and (5), of section 410(b) shall apply. (D)

Differential wage payment

For purposes of this paragraph, the term differential wage payment has the meaning given such term by section 3401(h)(2).

(B)

Conforming amendment

The heading for section 414(u) of such Code is amended by inserting

and to Differential Wage Payments to Members on Active Duty

after

USERRA

. (2)

Differential wage payments treated as compensation for individual retirement plans

Section 219(f)(1) of the Internal Revenue Code of 1986 (defining compensation) is amended by adding at the end the following new sentence: The term compensation includes any differential wage payment (as defined in section 3401(h)(2)).. (3)

Effective date

The amendments made by this subsection shall apply to years beginning after December 31, 2007. (c)

Provisions relating to plan amendments

(1)

In general

If this subsection applies to any plan or annuity contract amendment— (A)such plan or contract shall be treated as being operated in accordance with the terms of the plan or contract during the period described in paragraph (2)(B)(i), and (B)except as provided by the Secretary of the Treasury, such plan shall not fail to meet the requirements of the Internal Revenue Code of 1986 or the Employee Retirement Income Security Act of 1974 by reason of such amendment. (2)

Amendments to which section applies

(A)

In general

This subsection shall apply to any amendment to any plan or annuity contract which is made— (i)pursuant to any amendment made by this section, and (ii)on or before the last day of the first plan year beginning on or after January 1, 2009. (B)

Conditions

This subsection shall not apply to any plan or annuity contract amendment unless— (i)during the period beginning on the date the amendment described in subparagraph (A)(i) takes effect and ending on the date described in subparagraph (A)(ii) (or, if earlier, the date the plan or contract amendment is adopted), the plan or contract is operated as if such plan or contract amendment were in effect, and (ii)such plan or contract amendment applies retroactively for such period.

Contributions of military death gratuities to certain tax-favored accounts

(a)

Roth IRAs

(1)

Provision in effect before pension protection act

Subsection (e) of section 408A of the Internal Revenue Code of 1986 (relating to qualified rollover contribution), as in effect before the amendments made by section 824 of the Pension Protection Act of 2006, is amended to read as follows:

(e)

Qualified rollover contribution

For purposes of this section— (1)

In general

The term qualified rollover contribution means a rollover contribution to a Roth IRA from another such account, or from an individual retirement plan, but only if such rollover contribution meets the requirements of section 408(d)(3). Such term includes a rollover contribution described in section 402A(c)(3)(A). For purposes of section 408(d)(3)(B), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other than a Roth IRA) to a Roth IRA. (2)

Military death gratuity

(A)

In general

The term qualified rollover contribution includes a contribution to a Roth IRA maintained for the benefit of an individual to the extent that such contribution does not exceed the amount received by such individual under section 1477 of title 10, United States Code, or under section 1967 of title 38 of such Code, if such contribution is made not later than 1 year after the day on which such individual receives such amount. (B)

Annual limit on number of rollovers not to apply

Section 408(d)(3)(B) shall not apply with respect to amounts treated as a rollover by the subparagraph (A). (C)

Application of section 72

For purposes of applying section 72 in the case of a distribution which is not a qualified distribution, the amount treated as a rollover by reason of subparagraph (A) shall be treated as investment in the contract.

(2)

Provision in effect after pension protection act

Subsection (e) of section 408A, as in effect after the amendments made by section 824 of the Pension Protection Act of 2006, is amended to read as follows:

(e)

Qualified Rollover Contribution

For purposes of this section— (1)

In general

The term qualified rollover contribution means a rollover contribution— (A)to a Roth IRA from another such account, (B)from an eligible retirement plan, but only if— (i)in the case of an individual retirement plan, such rollover contribution meets the requirements of section 408(d)(3), and (ii)in the case of any eligible retirement plan (as defined in section 402(c)(8)(B) other than clauses (i) and (ii) thereof), such rollover contribution meets the requirements of section 402(c), 403(b)(8), or 457(e)(16), as applicable.

For purposes of section 408(d)(3)(B), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other than a Roth IRA) to a Roth IRA.

(2)

Military death gratuity

(A)

In general

Annual limit on number of rollovers not to apply

Section 408(d)(3)(B) shall not apply with respect to amounts treated as a rollover by the subparagraph (A). (C)

Application of section 72

(b)

Health savings accounts and Archer MSAs

Sections 220(f)(5) and 223(f)(5) of the Internal Revenue Code of 1986 are each amended by adding at the end the following flush sentence:

For purposes of subparagraphs (A) and (B), rules similar to the rules of section 408A(e)(2) (relating to rollover treatment for contributions of military death gratuity) shall apply.

(c)

Education savings accounts

Section 530(d)(5) of the Internal Revenue Code of 1986 is amended by adding at the end the following new sentence: For purposes of this paragraph, rules similar to the rules of section 408A(e)(2) (relating to rollover treatment for contributions of military death gratuity) shall apply.. (d)

Effective dates

(1)

In general

Except as provided by paragraphs (2) and (3), the amendments made by this section shall apply with respect to deaths from injuries occurring on or after the date of the enactment of this Act. (2)

Application of amendments to deaths from injuries occurring on or after October 7, 2001, and before enactment

The amendments made by this section shall apply to any contribution made pursuant to section 408A(e)(2), 220(f)(5), 223(f)(5), or 530(d)(5) of the Internal Revenue Code of 1986, as amended by this Act, with respect to amounts received under section 1477 of title 10, United States Code, or under section 1967 of title 38 of such Code, for deaths from injuries occurring on or after October 7, 2001, and before the date of the enactment of this Act if such contribution is made not later than 1 year after the date of the enactment of this Act. (3)

Pension Protection Act changes

Section 408A(e)(1) of the Internal Revenue Code of 1986 (as in effect after the amendments made by subsection (a)(2)) shall apply to taxable years beginning after December 31, 2007.

Temporary increase in standard deduction for active duty military personnel

(a)

In general

Paragraph (3) of section 63(c) of the Internal Revenue Code of 1986 (defining additional standard deduction for the aged and blind) is amended to read as follows:

(3)

Additional standard deduction

For the purposes of paragraph (1), the additional standard deduction is the sum of— (A)the sum of each additional amount to which the taxpayer is entitled under subsection (f), plus (B)in the case of a taxable year beginning in 2007 or 2008, an additional amount of $1,000 for an individual for such taxable year if the individual who at any time during such taxable year is performing service in the uniformed services while on active duty for a period of more than 30 days.

(b)

Conforming amendments

(1)Section 3402(m)(3) of the the Internal Revenue Code of 1986 is amended by striking for the aged and blind. (2)Section 6012(a)(1)(B) of such Code is amended by adding at the end the following new sentence: The preceding sentence shall be applied without regard to section 63(c)(3)(B) and each of the amounts specified in subparagraph (A) shall be increased by the portion of any additional standard deduction to which the individual is entitled by reason of section 63(c)(3)(B).. (c)

Effective date

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

Election to include combat pay as earned income for purposes of earned income tax credit

(a)

In general

Clause (vi) of section 32(c)(2)(B) of the Internal Revenue Code of 1986 (defining earned income) is amended to read as follows:

(vi)a taxpayer may elect to treat amounts excluded from gross income by reason of section 112 as earned income.

(b)

Provision not subject to EGTRRA sunset

Section 105 of the Working Families Tax Relief Act of 2004 (relating to application of EGTRRA sunset to this title) shall not apply to section 104(b) of such Act. (c)

Effective date

The amendment made by this section shall apply to taxable years ending after December 31, 2007.

Distributions from retirement plans to individuals called to active duty

(a)

In general

Clause (iv) of section 72(t)(2)(G) of the Internal Revenue Code of 1986 is amended by striking , and before December 31, 2007. (b)

Effective date

The amendment made by this section shall apply to individuals ordered or called to active duty on or after December 31, 2007.