[Congressional Record Volume 147, Number 7 (Monday, January 22, 2001)]
[Senate]
[Pages S113-S155]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. DASCHLE (for himself, Mr. Baucus, Mr. Dorgan, Mr. Reid, 
        Mr. Durbin, Mr. Rockfeller, Mrs. Clinton, Mr. Kerry, Mr. 
        Schumer, Mr. Dodd, and Mr. Conrad):
  S. 9. A bill to amend the Internal Revenue Code of 1986 to provide 
tax relief, and for other purposes; to the Committee on Finance.


                 working family tax relief act of 2001

  Mr. DASCHLE. Mr. President, I ask unanimous consent that the text of 
the bill be printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

[[Page S146]]

                                  S. 9

       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:

``For taxable years beginning in:         The applicable 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

[[Page S147]]

     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 decedentThe applicable 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 decedentThe applicable 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.

[[Page S148]]

       ``(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:


[[Page S149]]


``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:

``If the recapture event occurs The applicable recapture 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

[[Page S150]]

     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.

[[Page S151]]

     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.

[[Page S152]]

       ``(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 household               All other cases           Applicable
-------------------------------------------------------------------------------------------------   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.--

[[Page S153]]

       (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.

[[Page S154]]

     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 purusant 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''.

[[Page S155]]

       (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.
                                 ______