[Congressional Bills 110th Congress]
[From the U.S. Government Publishing Office]
[S. 455 Introduced in Senate (IS)]







110th CONGRESS
  1st Session
                                 S. 455

  To amend the Internal Revenue Code of 1986 to provide tax relief to 
 active duty military personnel and employers who assist them, and for 
                            other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                            January 31, 2007

   Mr. Kerry 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 to 
 active duty military personnel and employers who assist them, 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.

    This Act may be cited as the ``Active Duty Military Tax Relief Act 
of 2007''.

SEC. 2. 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:

``SEC. 30C. 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, 29, and 30, 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 ``30C,'' before ``45A(a),''.
    (c) Conforming Amendment.--Section 55(c)(2) of the Internal Revenue 
Code of 1986 is amended by inserting ``30C(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 of 30A the following new item:

``Sec. 30C. 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.

SEC. 3. 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.

SEC. 4. 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.--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.''.
    (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.

SEC. 5. 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.

SEC. 6. PERMANENT EXTENSION OF ELECTION TO INCLUDE COMBAT PAY AS EARNED 
              INCOME FOR PURPOSES OF EARNED INCOME CREDIT.

    (a) In General.--Section 32(c)(2)(B)(vi) of the Internal Revenue 
Code of 1986, as amended by section 106 of division A of the Tax Relief 
and Health Care Act of 2006, is amended to read as follows:
                            ``(vi) a taxpayer may elect to treat 
                        amounts excluded from gross income by means of 
                        section 112 as earned income.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.
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