[Congressional Record Volume 153, Number 19 (Wednesday, January 31, 2007)]
[Senate]
[Pages S1431-S1434]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KERRY:
  S. 455. A bill to amend the Internal Revenue Code of 1986 to provide 
tax relief to active duty military personnel and employers who assist 
them, and for other purposes; to the Committee on Finance.
  Mr. KERRY. Mr. President, today Senator Smith and I are introducing 
the Active Duty Military Tax Relief Act of 2007. This legislation will 
help those who are valiantly serving their country and the families 
that they leave behind.
  The best definition of patriotism is keeping faith with those who 
wear the uniform of our country. That means giving our troops the 
resources they need to keep them safe while they are protecting us. And 
it means supporting our troops at home as well as abroad.
  Currently, there are over 132,000 military personnel serving in Iraq 
and more are on the way. There are approximately 22,100 U.S. 
servicemembers in Afghanistan. Many of these men and women are 
reservists and have been called to activity duty, frequently for 
multiple tours. Often they own, or are employed, by a small business 
and their activation results in hardship for the business.
  Small businesses with less than 100 employees employ about 18 percent 
of all reservists who hold civilian jobs. Most large businesses have 
the resources to provide supplemental income to reservist employees 
called up and to replace them with temporary employees. I applaud the 
businesses that have been able to pay supplemental income to their 
reservists, but it is not easy for small businesses to do the same.
  Earlier today, the Small Business and Entrepreneurship Committee held 
a hearing on veterans' small business issues. A majority of our 
veterans returning from Iraq and Afghanistan are Reserve and National 
Guard members--35 percent of whom are either self-employed or own or 
are employed by a small business.
  We heard some disturbing statistics about the impact and unintended 
consequences the callup of reservists is having on small businesses. 
According to a January 2007 survey conducted by Workforce Management, 
54 percent of the businesses surveyed responded that they would not 
hire a citizen soldier if they knew that they could be called up for an 
indeterminate amount of time. I am concerned that long callups have 
made it hard for small businesses to be supportive of civilian 
soldiers.
  The Active Duty Military Tax Relief Act of 2007 provides a tax credit 
to small businesses with fewer than 100 employees and the self-employed 
to help with the cost of paying the salary of their reservist employees 
when they are called to active duty. This legislation also provides an 
additional tax credit to help offset the cost of hiring temporary 
employees to fill vacancies left by the servicemembers.
  Many reservists who own their own business return from duty to find 
that their business is floundering. These tax credits will help 
reservists who own their own businesses to hire temporary employees for 
the duration of their tour as well as to assist small businesses deal 
with the impact of having an essential employee called up for active 
duty.
  In addition to helping small businesses, the Active Duty Military Tax 
Relief of 2007 addresses concerns related to differential military pay, 
income tax withholding, and retirement plan participation. These 
provisions will make it easier for employers who would like to pay 
their employees supplemental income, above their military pay, and make 
pension contributions. Our legislation would make differential military 
pay subject to Federal income tax withholding. In addition, with 
respect to the retirement plan rules, the bill provides that a person 
receiving differential military pay would be treated as an employee of 
the employer making the payment and allows the differential military 
pay to be treated as compensation.
  This bill also attempts to mitigate the financial strains placed on 
our military families while the family member is deployed. To help ease 
some of this burden, the Active Duty Military Tax Relief Act of 2007 
would increase the standard deduction for active duty military 
personnel by $1,000 for 2007 and 2008. In addition, this legislation 
would make permanent the existing provision which allows taxpayers to 
include combat pay as earned income for purposes of the earned income 
tax credit (EITC). Without this provision some military families would 
no longer be eligible to receive the EITC because combat pay is 
currently not taxable.
  Last Congress, Senator Smith and I introduced the Fallen Heroes 
Family Savings Act, which we have incorporated into the Active Duty 
Military Tax Relief Act. This provision provides tax relief for the 
death gratuity payment that is given to families that have lost a loved 
one in combat. This payment is currently $100,000.
  Our current tax laws do not allow the recipients of this payment to 
use it to make contributions to tax-preferred saving accounts that help 
with saving for retirement, health care, or the costs of education. Our 
legislation would allow military death gratuities to be contributed to 
certain tax-preferred accounts. These contributions would be treated as 
qualified rollovers. The contribution limits of these accounts will not 
be applied to these contributions.
  Our service men and women need to know that we are honoring their 
valor by taking care of those they leave behind. Helping ease the tax 
burden on the death gratuity will enable military families to save more 
for retirement, education, and health care by allowing them to put the 
payment in an account in which the earnings will accumulate tax-free.
  These changes to our tax laws will help our military families with 
some of their financial burdens. It cannot repay the sacrifices they 
have made for us, but it is a small way we can support our troops and 
their families at home as well as abroad.
  The National Military Family Association, the Reserve Officers 
Association, and The Military Coalition (a consortium of veterans and 
military organizations representing more than 5.5 million members plus 
their families and survivors) support this legislation.
  I ask unanimous consent that the text of this legislation be printed 
in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                 S. 455

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

[[Page S1432]]

     SECTION 1. SHORT TITLE.

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

     SEC. 2. CREDIT FOR INCOME DIFFERENTIAL FOR EMPLOYMENT OF 
                   ACTIVATED MILITARY RESERVIST AND REPLACEMENT 
                   PERSONNEL.

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

     ``SEC. 30C. EMPLOYER WAGE CREDIT FOR ACTIVATED MILITARY 
                   RESERVISTS.

       ``(a) General Rule.--There shall be allowed as a credit 
     against the tax imposed by this chapter for the taxable year 
     an amount equal to the sum of--
       ``(1) in the case of an eligible small business employer, 
     the employment credit with respect to all qualified employees 
     and qualified replacement employees of the taxpayer, plus
       ``(2) the self-employment credit of a qualified self-
     employed taxpayer.
       ``(b) Employment Credit.--For purposes of this section--
       ``(1) Qualified employees.--
       ``(A) In general.--The employment credit with respect to a 
     qualified employee of the taxpayer for any taxable year is 
     equal to 40 percent of so much of the excess (if any) paid by 
     the taxpayer to such qualified employee of--
       ``(i) the qualified employee's average daily qualified 
     compensation for the taxable year, over
       ``(ii) the average daily military pay and allowances 
     received by the qualified employee during the taxable year 
     while participating in qualified reserve component duty to 
     the exclusion of the qualified employee's normal employment 
     duties,

     for the aggregate number of days the qualified employee 
     participates in qualified reserve component duty during the 
     taxable year (including time spent in a travel status) as 
     does not exceed $25,000. The employment credit, with respect 
     to all qualified employees, is equal to the sum of the 
     employment credits for each qualified employee under this 
     subsection.
       ``(B) Average daily qualified compensation and average 
     daily military pay and allowances.--As used with respect to a 
     qualified employee--
       ``(i) the term `average daily qualified compensation' means 
     the qualified compensation of the qualified employee for the 
     taxable year divided by 365, and
       ``(ii) the term `average daily military pay and allowances' 
     means--

       ``(I) the amount paid to the qualified employee during the 
     taxable year as military pay and allowances on account of the 
     qualified employee's participation in qualified reserve 
     component duty, divided by
       ``(II) the total number of days the qualified employee 
     participates in qualified reserve component duty, including 
     time spent in travel status.

       ``(C) Qualified compensation.--When used with respect to 
     the compensation paid to a qualified employee for any period 
     during which the qualified employee participates in qualified 
     reserve component duty, the term `qualified compensation' 
     means--
       ``(i) compensation which is normally contingent on the 
     qualified employee's presence for work and which would be 
     deductible from the taxpayer's gross income under section 
     162(a)(1) if the qualified employee were present and 
     receiving such compensation,
       ``(ii) compensation which is not characterized by the 
     taxpayer as vacation or holiday pay, or as sick leave or pay, 
     or as any other form of pay for a nonspecific leave of 
     absence, and with respect to which the number of days the 
     qualified employee participates in qualified reserve 
     component duty does not result in any reduction in the amount 
     of vacation time, sick leave, or other nonspecific leave 
     previously credited to or earned by the qualified employee, 
     and
       ``(iii) group health plan costs (if any) with respect to 
     the qualified employee.
       ``(D) Qualified employee.--The term `qualified employee' 
     means a person who--
       ``(i) has been an employee of the taxpayer for the 91-day 
     period immediately preceding the period during which the 
     employee participates in qualified reserve component duty, 
     and
       ``(ii) is a member of the Ready Reserve of a reserve 
     component of an Armed Force of the United States as defined 
     in sections 10142 and 10101 of title 10, United States Code.
       ``(2) Qualified replacement employees.--
       ``(A) In general.--The employment credit with respect to a 
     qualified replacement employee of the taxpayer for any 
     taxable year is equal to 40 percent of so much of the 
     individual's qualified compensation attributable to service 
     rendered as a qualified replacement employee as does not 
     exceed $15,000. The employment credit, with respect to all 
     qualified replacement employees, is equal to the sum of the 
     employment credits for each qualified replacement employee 
     under this subsection.
       ``(B) Qualified compensation.--When used with respect to 
     the compensation paid to a qualified replacement employee, 
     the term `qualified compensation' means--
       ``(i) compensation which is normally contingent on the 
     qualified replacement employee's presence for work and which 
     is deductible from the taxpayer's gross income under section 
     162(a)(1),
       ``(ii) compensation which is not characterized by the 
     taxpayer as vacation or holiday pay, or as sick leave or pay, 
     or as any other form of pay for a nonspecific leave of 
     absence, and
       ``(iii) group health plan costs (if any) with respect to 
     the qualified replacement employee.
       ``(C) Qualified replacement employee.--The term `qualified 
     replacement employee' means an individual who is hired to 
     replace a qualified employee or a qualified self-employed 
     taxpayer, but only with respect to the period during which 
     such employee or taxpayer participates in qualified reserve 
     component duty, including time spent in travel status, and, 
     in the case of a qualified employee, is receiving qualified 
     compensation (as defined in paragraph (1)(C)) for which an 
     employment credit is allowed as determined under paragraph 
     (1).
       ``(c) Self-Employment Credit.--For purposes of this 
     section--
       ``(1) In general.--The self-employment credit of a 
     qualified self-employed taxpayer for any taxable year is 
     equal to 40 percent of so much of the excess (if any) of--
       ``(A) the qualified self-employed taxpayer's average daily 
     qualified compensation for the taxable year, over
       ``(B) the average daily military pay and allowances 
     received by the taxpayer during the taxable year while 
     participating in qualified reserve component duty to the 
     exclusion of the taxpayer's normal self-employment duties,

     for the aggregate number of days the taxpayer participates in 
     qualified reserve component duty during the taxable year 
     (including time spent in a travel status) as does not exceed 
     $25,000.
       ``(2) Average daily qualified compensation and average 
     daily military pay and allowances.--As used with respect to a 
     qualified self-employed taxpayer--
       ``(A) the term `average daily qualified compensation' means 
     the qualified compensation of the qualified self-employed 
     taxpayer for the taxable year divided by 365 days, and
       ``(B) the term `average daily military pay and allowances' 
     means--
       ``(i) the amount paid to the taxpayer during the taxable 
     year as military pay and allowances on account of the 
     taxpayer's participation in qualified reserve component duty, 
     divided by
       ``(ii) the total number of days the taxpayer participates 
     in qualified reserve component duty, including time spent in 
     travel status.
       ``(3) Qualified compensation.--When used with respect to 
     the compensation paid to a qualified self-employed taxpayer 
     for any period during which the qualified self-employed 
     taxpayer participates in qualified reserve component duty, 
     the term `qualified compensation' means--
       ``(A) the self-employment income (as defined in section 
     1402(b) of the taxpayer which is normally contingent on the 
     taxpayer's presence for work,
       ``(B) compensation which is not characterized by the 
     taxpayer as vacation or holiday pay, or as sick leave or pay, 
     or as any other form of pay for a nonspecific leave of 
     absence, and
       ``(C) the amount paid for insurance which constitutes 
     medical care for the taxpayer for such year (within the 
     meaning of section 162(l)).
       ``(4) Qualified self-employed taxpayer.--The term 
     `qualified self-employed taxpayer' means a taxpayer who--
       ``(A) has net earnings from self-employment (as defined in 
     section 1402(a)) for the taxable year, and
       ``(B) is a member of the Ready Reserve of a reserve 
     component of an Armed Force of the United States.
       ``(d) Coordination With Other Credits.--The amount of 
     credit otherwise allowable under this chapter with respect to 
     compensation paid to any employee shall be reduced by the 
     credit allowed by this section with respect to such employee.
       ``(e) Limitations.--
       ``(1) Application with other credits.--The credit allowed 
     under subsection (a) for any taxable year shall not exceed 
     the excess (if any) of--
       ``(A) the regular tax for the taxable year reduced by the 
     sum of the credits allowable under subpart A and sections 27, 
     29, and 30, over
       ``(B) the tentative minimum tax for the taxable year.
       ``(2) Disallowance for failure to comply with employment or 
     reemployment rights of members of the reserve components of 
     the armed forces of the united states.--No credit shall be 
     allowed under subsection (a) to a taxpayer for--
       ``(A) any taxable year, beginning after the date of the 
     enactment of this section, in which the taxpayer is under a 
     final order, judgment, or other process issued or required by 
     a district court of the United States under section 4323 of 
     title 38 of the United States Code with respect to a 
     violation of chapter 43 of such title, and
       ``(B) the 2 succeeding taxable years.
       ``(3) Disallowance with respect to persons ordered to 
     active duty for training.--No credit shall be allowed under 
     subsection (a) to a taxpayer with respect to any period by 
     taking into account any person who is called or ordered to 
     active duty for any of the following types of duty:
       ``(A) Active duty for training under any provision of title 
     10, United States Code.
       ``(B) Training at encampments, maneuvers, outdoor target 
     practice, or other exercises under chapter 5 of title 32, 
     United States Code.

[[Page S1433]]

       ``(C) Full-time National Guard duty, as defined in section 
     101(d)(5) of title 10, United States Code.
       ``(f) General Definitions and Special Rules.--For purposes 
     of this section--
       ``(1) Eligible small business employer.--
       ``(A) In general.--The term `eligible small business 
     employer' means, with respect to any taxable year, any 
     employer which--
       ``(i) employed an average of 100 or fewer employees on 
     business days during such taxable year, and
       ``(ii) under a written plan of the employer, provides the 
     excess amount described in subsection (b)(1)(A) to every 
     qualified employee of the employer.
       ``(B) Controlled groups.--For purposes of subparagraph (A), 
     all persons treated as a single employer under subsection 
     (b), (c), (m), or (o) of section 414 shall be treated as a 
     single employer.
       ``(2) Military pay and allowances.--The term `military pay' 
     means pay as that term is defined in section 101(21) of title 
     37, United States Code, and the term `allowances' means the 
     allowances payable to a member of the Armed Forces of the 
     United States under chapter 7 of that title.
       ``(3) Qualified reserve component duty.--The term 
     `qualified reserve component duty' includes only active duty 
     performed, as designated in the reservist's military orders, 
     in support of a contingency operation as defined in section 
     101(a)(13) of title 10, United States Code.
       ``(4) Carryback and carryforward allowed.--
       ``(A) In general.--If the credit allowable under subsection 
     (a) for a taxable year exceeds the amount of the limitation 
     under subsection (f)(1) for such taxable year (in this 
     paragraph referred to as the `unused credit year'), such 
     excess shall be a credit carryback to the taxable year 
     preceding the unused credit year and a credit carryforward to 
     each of the 20 taxable years following the unused credit 
     year.
       ``(B) Rules.--Rules similar to the rules of section 39 
     shall apply with respect to the credit carryback and credit 
     carryforward under subparagraph (A).
       ``(5) Certain rules to apply.--Rules similar to the rules 
     of subsections (c), (d), and (e) of section 52 shall 
     apply.''.
       (b) No Deduction for Compensation Taken Into Account for 
     Credit.--Section 280C(a) of the Internal Revenue Code of 1986 
     (relating to rule for employment credits) is amended--
       (1) by inserting ``or compensation'' after ``salaries'', 
     and
       (2) by inserting ``30C,'' before ``45A(a),''.
       (c) Conforming Amendment.--Section 55(c)(2) of the Internal 
     Revenue Code of 1986 is amended by inserting ``30C(e)(1),'' 
     after ``30(b)(3),''.
       (d) Clerical Amendment.--The table of sections for subpart 
     B of part IV of subchapter A of chapter 1 of the Internal 
     Revenue Code of 1986 is amended by adding at the end of 30A 
     the following new item:

``Sec. 30C. Employer wage credit for activated military reservists.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to amounts paid in taxable years beginning after 
     December 31, 2006.

     SEC. 3. DIFFERENTIAL WAGE PAYMENTS.

       (a) Income Tax Withholding on Differential Wage Payments.--
       (1) In general.--Section 3401 of the Internal Revenue Code 
     of 1986 (relating to definitions) is amended by adding at the 
     end the following new subsection:
       ``(h) Differential Wage Payments to Active Duty Members of 
     the Uniformed Services.--
       ``(1) In general.--For purposes of subsection (a), any 
     differential wage payment shall be treated as a payment of 
     wages by the employer to the employee.
       ``(2) Differential wage payment.--For purposes of paragraph 
     (1), the term `differential wage payment' means any payment 
     which--
       ``(A) is made by an employer to an individual with respect 
     to any period during which the individual is performing 
     service in the uniformed services while on active duty for a 
     period of more than 30 days, and
       ``(B) represents all or a portion of the wages the 
     individual would have received from the employer if the 
     individual were performing service for the employer.''.
       (2) Effective date.--The amendment made by this subsection 
     shall apply to remuneration paid after December 31, 2007.
       (b) Treatment of Differential Wage Payments for Retirement 
     Plan Purposes.--
       (1) Pension plans.--
       (A) In general.--Section 414(u) of the Internal Revenue 
     Code of 1986 (relating to special rules relating to veterans' 
     reemployment rights under USERRA) is amended by adding at the 
     end the following new paragraph:
       ``(11) Treatment of differential wage payments.--
       ``(A) In general.--Except as provided in this paragraph, 
     for purposes of applying this title to a retirement plan to 
     which this subsection applies--
       ``(i) an individual receiving a differential wage payment 
     shall be treated as an employee of the employer making the 
     payment,
       ``(ii) the differential wage payment shall be treated as 
     compensation, and
       ``(iii) the plan shall not be treated as failing to meet 
     the requirements of any provision described in paragraph 
     (1)(C) by reason of any contribution or benefit which is 
     based on the differential wage payment.
       ``(B) Special rule for distributions.--
       ``(i) In general.--Notwithstanding subparagraph (A)(i), for 
     purposes of section 401(k)(2)(B)(i)(I), 403(b)(7)(A)(ii), 
     403(b)(11)(A), or 457(d)(1)(A)(ii), an individual shall be 
     treated as having been severed from employment during any 
     period the individual is performing service in the uniformed 
     services described in section 3401(h)(2)(A).
       ``(ii) Limitation.--If an individual elects to receive a 
     distribution by reason of clause (i), the plan shall provide 
     that the individual may not make an elective deferral or 
     employee contribution during the 6-month period beginning on 
     the date of the distribution.
       ``(C) Nondiscrimination requirement.--Subparagraph (A)(iii) 
     shall apply only if all employees of an employer (as 
     determined under subsections (b), (c), (m), and (o)) 
     performing service in the uniformed services described in 
     section 3401(h)(2)(A) are entitled to receive differential 
     wage payments on reasonably equivalent terms and, if eligible 
     to participate in a retirement plan maintained by the 
     employer, to make contributions based on the payments on 
     reasonably equivalent terms. For purposes of applying this 
     subparagraph, the provisions of paragraphs (3), (4), and (5), 
     of section 410(b) shall apply.
       ``(D) Differential wage payment.--For purposes of this 
     paragraph, the term `differential wage payment' has the 
     meaning given such term by section 3401(h)(2).''.
       (B) Conforming amendment.--The heading for section 414(u) 
     of such Code is amended by inserting ``and to Differential 
     Wage Payments to Members on Active Duty'' after ``USERRA''.
       (2) Differential wage payments treated as compensation for 
     individual retirement plans.--Section 219(f)(1) of the 
     Internal Revenue Code of 1986 (defining compensation) is 
     amended by adding at the end the following new sentence: 
     ``The term `compensation' includes any differential wage 
     payment (as defined in section 3401(h)(2)).''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to years beginning after December 31, 2007.
       (c) Provisions Relating to Plan Amendments.--
       (1) In general.--If this subsection applies to any plan or 
     annuity contract amendment--
       (A) such plan or contract shall be treated as being 
     operated in accordance with the terms of the plan or contract 
     during the period described in paragraph (2)(B)(i), and
       (B) except as provided by the Secretary of the Treasury, 
     such plan shall not fail to meet the requirements of the 
     Internal Revenue Code of 1986 or the Employee Retirement 
     Income Security Act of 1974 by reason of such amendment.
       (2) Amendments to which section applies.--
       (A) In general.--This subsection shall apply to any 
     amendment to any plan or annuity contract which is made--
       (i) pursuant to any amendment made by this section, and
       (ii) on or before the last day of the first plan year 
     beginning on or after January 1, 2009.
       (B) Conditions.--This subsection shall not apply to any 
     plan or annuity contract amendment unless--
       (i) during the period beginning on the date the amendment 
     described in subparagraph (A)(i) takes effect and ending on 
     the date described in subparagraph (A)(ii) (or, if earlier, 
     the date the plan or contract amendment is adopted), the plan 
     or contract is operated as if such plan or contract amendment 
     were in effect, and
       (ii) such plan or contract amendment applies retroactively 
     for such period.

     SEC. 4. CONTRIBUTIONS OF MILITARY DEATH GRATUITIES TO CERTAIN 
                   TAX-FAVORED ACCOUNTS.

       (a) Roth IRAs.--
       (1) Provision in effect before pension protection act.--
     Subsection (e) of section 408A of the Internal Revenue Code 
     of 1986 (relating to qualified rollover contribution), as in 
     effect before the amendments made by section 824 of the 
     Pension Protection Act of 2006, is amended to read as 
     follows:
       ``(e) Qualified Rollover Contribution.--For purposes of 
     this section--
       ``(1) In general.--The term `qualified rollover 
     contribution' means a rollover contribution to a Roth IRA 
     from another such account, or from an individual retirement 
     plan, but only if such rollover contribution meets the 
     requirements of section 408(d)(3). Such term includes a 
     rollover contribution described in section 402A(c)(3)(A). For 
     purposes of section 408(d)(3)(B), there shall be disregarded 
     any qualified rollover contribution from an individual 
     retirement plan (other than a Roth IRA) to a Roth IRA.
       ``(2) Military death gratuity.--
       ``(A) In general.--The term `qualified rollover 
     contribution' includes a contribution to a Roth IRA 
     maintained for the benefit of an individual to the extent 
     that such contribution does not exceed the amount received by 
     such individual under section 1477 of title 10, United States 
     Code, or under section 1967 of title 38 of such Code, if such 
     contribution is made not later than 1 year after the day on 
     which such individual receives such amount.
       ``(B) Annual limit on number of rollovers not to apply.--
     Section 408(d)(3)(B) shall not apply with respect to amounts 
     treated as a rollover by the subparagraph (A).

[[Page S1434]]

       ``(C) Application of section 72.--For purposes of applying 
     section 72 in the case of a distribution which is not a 
     qualified distribution, the amount treated as a rollover by 
     reason of subparagraph (A) shall be treated as investment in 
     the contract.''.
       (2) Provision in effect after pension protection act.--
     Subsection (e) of section 408A, as in effect after the 
     amendments made by section 824 of the Pension Protection Act 
     of 2006, is amended to read as follows:
       ``(e) Qualified Rollover Contribution.--For purposes of 
     this section--
       ``(1) In general.--The term `qualified rollover 
     contribution' means a rollover contribution--
       ``(A) to a Roth IRA from another such account,
       ``(B) from an eligible retirement plan, but only if--
       ``(i) in the case of an individual retirement plan, such 
     rollover contribution meets the requirements of section 
     408(d)(3), and
       ``(ii) in the case of any eligible retirement plan (as 
     defined in section 402(c)(8)(B) other than clauses (i) and 
     (ii) thereof), such rollover contribution meets the 
     requirements of section 402(c), 403(b)(8), or 457(e)(16), as 
     applicable.

     For purposes of section 408(d)(3)(B), there shall be 
     disregarded any qualified rollover contribution from an 
     individual retirement plan (other than a Roth IRA) to a Roth 
     IRA.
       ``(2) Military death gratuity.--
       ``(A) In general.--The term `qualified rollover 
     contribution' includes a contribution to a Roth IRA 
     maintained for the benefit of an individual to the extent 
     that such contribution does not exceed the amount received by 
     such individual under section 1477 of title 10, United States 
     Code, or under section 1967 of title 38 of such Code, if such 
     contribution is made not later than 1 year after the day on 
     which such individual receives such amount.
       ``(B) Annual limit on number of rollovers not to apply.--
     Section 408(d)(3)(B) shall not apply with respect to amounts 
     treated as a rollover by the subparagraph (A).
       ``(C) Application of section 72.--For purposes of applying 
     section 72 in the case of a distribution which is not a 
     qualified distribution, the amount treated as a rollover by 
     reason of subparagraph (A) shall be treated as investment in 
     the contract.''.
       (b) Health Savings Accounts and Archer MSAs.--Sections 
     220(f)(5) and 223(f)(5) of the Internal Revenue Code of 1986 
     are each amended by adding at the end the following flush 
     sentence:

     ``For purposes of subparagraphs (A) and (B), rules similar to 
     the rules of section 408A(e)(2) (relating to rollover 
     treatment for contributions of military death gratuity) shall 
     apply.''.
       (c) Education Savings Accounts.--Section 530(d)(5) of the 
     Internal Revenue Code of 1986 is amended by adding at the end 
     the following new sentence: ``For purposes of this paragraph, 
     rules similar to the rules of section 408A(e)(2) (relating to 
     rollover treatment for contributions of military death 
     gratuity) shall apply.''.
       (d) Effective Dates.--
       (1) In general.--Except as provided by paragraphs (2) and 
     (3), the amendments made by this section shall apply with 
     respect to deaths from injuries occurring on or after the 
     date of the enactment of this Act.
       (2) Application of amendments to deaths from injuries 
     occurring on or after october 7, 2001, and before 
     enactment.--The amendments made by this section shall apply 
     to any contribution made pursuant to section 408A(e)(2), 
     220(f)(5), 223(f)(5), or 530(d)(5) of the Internal Revenue 
     Code of 1986, as amended by this Act, with respect to amounts 
     received under section 1477 of title 10, United States Code, 
     or under section 1967 of title 38 of such Code, for deaths 
     from injuries occurring on or after October 7, 2001, and 
     before the date of the enactment of this Act if such 
     contribution is made not later than 1 year after the date of 
     the enactment of this Act.
       (3) Pension protection act changes.--Section 408A(e)(1) of 
     the Internal Revenue Code of 1986 (as in effect after the 
     amendments made by subsection (a)(2)) shall apply to taxable 
     years beginning after December 31, 2007.

     SEC. 5. TEMPORARY INCREASE IN STANDARD DEDUCTION FOR ACTIVE 
                   DUTY MILITARY PERSONNEL.

       (a) In General.--Paragraph (3) of section 63(c) of the 
     Internal Revenue Code of 1986 (defining additional standard 
     deduction for the aged and blind) is amended to read as 
     follows:
       ``(3) Additional standard deduction.--For the purposes of 
     paragraph (1), the additional standard deduction is the sum 
     of--
       ``(A) the sum of each additional amount to which the 
     taxpayer is entitled under subsection (f), plus
       ``(B) in the case of a taxable year beginning in 2007 or 
     2008, an additional amount of $1,000 for an individual for 
     such taxable year if the individual who at any time during 
     such taxable year is performing service in the uniformed 
     services while on active duty for a period of more than 30 
     days.''.
       (b) Conforming Amendments.--
       (1) Section 3402(m)(3) of the the Internal Revenue Code of 
     1986 is amended by striking ``for the aged and blind''.
       (2) Section 6012(a)(1)(B) of such Code is amended by adding 
     at the end the following new sentence: ``The preceding 
     sentence shall be applied without regard to section 
     63(c)(3)(B) and each of the amounts specified in subparagraph 
     (A) shall be increased by the portion of any additional 
     standard deduction to which the individual is entitled by 
     reason of section 63(c)(3)(B).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2006.

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

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