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(**) These provisions were dropped from the final bill.
A.
Child Tax Credit (sec. 101(a), (c), and (d) of the House
bill and sec. 101 of the Senate amendment)
Present Law
In general
Present law does not provide tax credits based solely on the taxpayer's number of dependent children. Taxpayers with dependent children, however, generally are able to claim a personal exemption for each of these dependents. The total amount of personal exemptions is subtracted (along with certain other items) from adjusted gross income (AGI) in arriving at taxable income. The amount of each personal exemption is $2,650 for 1997, and is adjusted annually for inflation. In 1997, the amount of the personal exemption is phased out for taxpayers with AGI in excess of $121,200 for single taxpayers, $151,500 for heads of household, and $181,800 for married couples filing joint returns. These phaseout thresholds are adjusted annually for inflation.
Dependent care credit
A nonrefundable credit against income tax liability is available for up to 30 percent (phased down to 20 percent for individuals with AGI above $28,000) of a limited dollar amount of employment-related child and dependent care expenses for certain qualified individuals: (1) a dependent child under age 13; (2) a dependent physically or mentally unable to care for him or herself; or (3) a spouse who is physically or mentally unable to care for him or herself. Eligible employment-related expenses are limited to $2,400 if there is one qualifying individual and $4,800 if there are two or more qualifying individuals. Employment-related expenses are expenses for household services and the care of a qualifying individual, if incurred to enable the taxpayer to be gainfully employed. Employment-related expenses are reduced to the extent the taxpayer has employer-provided dependent care assistance that is excludable from gross income.
House Bill
Size of credit
The House bill provides a $500 ($400 for taxable year 1998) nonrefundable tax credit for each qualifying child under the age of 17.
Qualifying child
A qualifying child is defined as an individual for whom the taxpayer can claim a dependency exemption and who is a son or daughter of the taxpayer (or descendent of either), a stepson or stepdaughter of the taxpayer or an eligible foster child of the taxpayer.
Savings requirement
No provision.
Reduction for dependent care credit
After 1999, the child credit is reduced by one-half of the dependent care credit (no reduction with respect to dependents who are physically or mentally incapable of self-care). The reduction applies to married individuals with AGI above $60,000 ($30,000 for married individuals filing separately). In the case taxpayer's filing as a single or head of household, the reduction applies to AGI above $33,000.
Phaseout of credit
For taxpayers with modified AGI in excess of certain thresholds, the sum of the otherwise allowable child credit and the otherwise allowable dependent care credit is phased out. The phaseout rate is $25 for each $1,000 of modified AGI (or fraction thereof) in excess of the threshold. The reduction is applied first to the child credit and then to the dependent care credit. For married taxpayers filing joint returns, the threshold is $110,000. For taxpayers filing single or head of household returns, the threshold is $75,000. For married taxpayers filing separate returns, the threshold is $55,000. These thresholds are not indexed for inflation.
Maximum allowable child credit
The maximum amount of the child credit for each taxable year (after the reduction, if any, for the dependent care credit after 2001) could not exceed an amount equal to the excess of: (1) the taxpayer's regular income tax liability (net of applicable credits) over (2) the sum of the taxpayer's tentative minimum tax liability (determined without regard to the alternative minimum foreign tax credit) and the earned income credit allowed.
IRS notice and withholding
The House bill provides that the Secretary of the Treasury shall submit notice to all taxpayers of the passage of the child tax credit. In addition, it directs the Secretary of the Treasury to modify the withholding tables for single taxpayers claiming more than one exemption and for married taxpayers claiming more than two exemptions to take account of the effects of the child tax credit. The adjustments to the withholding tables apply to employees whose annualized wages from an employer are expected to be at least $30,000, but not more than $100,000.
Effective date
Generally, the child tax credit is effective for taxable years beginning after December 31, 1997. The provision to reduce the other-wise allowable child credit by one-half of the amount of the taxpayer's dependent care credit is effective for taxable years beginning after December 31, 2001.
Senate Amendment
Size of credit
The Senate amendment provides a $500 ($250 in 1997 for children under the age of 13) nonrefundable tax credit for each qualifying child under the age of 17. For taxable years beginning after December 31, 2002, the credit is allowed for each qualifying child under the age of 18.
Qualifying child
Same as the House bill.
Savings requirement
In the case of each child age 13 to 16 (13 to 17 for taxable years beginning after December 31, 2002), the credit generally is available only for amounts contributed to savings for education with respect to that child.
Reduction for dependent care credit
No provision.
Phaseout
Generally the same as the House bill, except the dependent care credit is not phased out.
Maximum allowable child credit
The maximum amount of the child credit for each taxable year cannot exceed an amount equal to the excess of: (1) the taxpayer's regular income tax liability (net of applicable credits) over (2) the sum of the taxpayer's tentative minimum tax liability (determined without regard to the alternative minimum foreign tax credit) and one-half of the earned income credit allowed.
IRS notice and withholding
No provision.
Effective date
The child tax credit is effective July 1, 1997, for taxable years beginning after December 31, 1996.
Conference Agreement
Size of credit
The conference agreement provides a $500 ($400 for taxable year 1998) credit for each qualifying child under the age of 17.
Qualifying child
The conference agreement follows the House bill and the Senate amendment. The conference agreement includes a requirement that the taxpayer include the name and taxpayer identification number (TIN) for each qualifying child. The conference agreement also extends the math and clerical error rule to the child tax credit.
Savings requirement
The conference agreement does not include the Senate amendment.
Reduction for dependent care credit
The conference agreement does not include the House bill provision.
Phaseout
The conference agreement follows the House bill and the Senate amendment with one modification. The modification is to increase the phaseout rate to $50 for each $1,000 of modified AGI (or fraction thereof) in excess of the threshold. The threshold amounts are unchanged from both the House bill and the Senate amendment.
Maximum allowable child credit
In general, in the case of a taxpayer with qualifying children, the amount of the child credit equals $500 times the number of qualifying children.
In the case of a taxpayer with one or two qualifying children, a portion of the child credit may be treated as a supplemental child credit amount. This amount equals the excess of (1) $500 times the number of qualifying children up to the excess of the taxpayer's income tax liability (net of applicable credits other than the earned income credit) over the taxpayer's tentative minimum tax liability (determined without regard to the alternative minimum foreign tax credit) over (2) the sum of the taxpayer's regular income tax liability (net of applicable credits other than the earned income credit) and the employee share of FICA (and one-half of the taxpayer's SECA tax liability, if applicable) reduced by any earned income credit amount. In no case will the total amount of the allowable child credit exceed the amount that would result from its calculation as a nonrefundable personal credit.
In the case of a taxpayer with three or more qualifying children, the maximum amount of the child credit for each taxable year cannot exceed the greater of: (1) the excess of the taxpayer's regular tax liability (net of applicable credits other than the earned income credit) over the taxpayer's tentative minimum tax liability (determined without regard to the alternative minimum foreign tax credit), or (2) an amount equal to the excess of the sum of the taxpayer's regular income tax liability (net of applicable credits other than the earned income credit) and the employee share of FICA (and one-half of the taxpayer's SECA tax liability, if applicable) reduced by the earned income credit. To the extent that the amount determined under (1) is greater than the amount determined under (2), the difference is treated as a supplemental child credit amount.
The conferees anticipate that the Secretary of the Treasury will determine whether a simplified method of calculating the child credit, consistent with the formula described above, can be achieved.
Refundable child credit amount
In the case of a taxpayer with three or more qualifying children, if the amount of the allowable child credit as computed under the computation described immediately above exceeds the taxpayer's regular tax liability before the computation, then the excess is a refundable tax credit.
IRS notice and withholding
The conference agreement does not include the House bill provision.
Effective date
Generally, the child tax credit is effective for taxable years beginning after December 31, 1997.
B. Expand Definition of High-Risk Individuals with Respect to Tax-Exempt State-Sponsored Organizations Providing Health Coverage (sec. 101(b) of the House bill)
Present Law
Present law provides tax-exempt status to any membership organization that is established by a State exclusively to provide coverage for medical care on a nonprofit basis to certain high-risk individuals, provided certain criteria are satisfied. The organization may provide coverage for medical care either by issuing insurance itself or by entering into an arrangement with a health maintenance organization ("HMO").
High-risk individuals eligible to receive medical care coverage from the organization must be residents of the State who, due to a pre-existing medical condition, are unable to obtain health coverage for such condition through insurance or an HMO, or are able to acquire such coverage only at a rate that is substantially higher than the rate charged for such coverage by the organization. The State must determine the composition of membership in the organization. For example, a State could mandate that all organizations that are subject to insurance regulation by the State must be members of the organization.
Present law further requires the State or members of the organization to fund the liabilities of the organization to the extent that premiums charged to eligible individuals are insufficient to cover such liabilities. Finally, no part of the net earnings of the organization can inure to the benefit of any private shareholder or individual.
House Bill
The House bill expands the definition of high-risk individuals to include a child of an individual who meets the present-law definition of a high-risk individual, subject to certain requirements. The requirements are: (1) the taxpayer is allowed a deduction for a personal exemption for the child for the taxable year; (2) the child 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 (3) the child is a son or daughter or the taxpayer (or a dependent of either), a stepson or stepdaughter of the taxpayer, or an eligible foster child of the taxpayer.
Effective date.--taxable years beginning after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill, with a modification to further expand the definition of high-risk individuals to include the spouse of an individual who meets the present-law definition of a high-risk individual.
C. Indexing of the Dependent Care Credit; Phase Out for High-Income Taxpayers (sec. 102 of the House bill)
Present Law
A nonrefundable credit against income tax liability is available for up to 30 percent of a limited dollar amount of employment-related child and dependent care expenses. The credit may be claimed by an individual who maintains a household that includes one or more qualifying individuals. A qualifying individual is a dependent of the taxpayer who is under the age of 13, a physically or mentally incapacitated dependent, or a physically or mentally incapacitated spouse.
Employment-related expenses are expenses for household services and the care of a qualifying individual, if incurred to enable the taxpayer to be gainfully employed. Eligible employment-related expenses are limited to $2,400 if there is one qualifying individual, and $4,800 if there are two or more qualifying individuals.
The 30-percent credit rate is reduced by one percentage point for each $2,000 (or fraction thereof) of adjusted gross income (AGI) above $10,000. A married couple's combined AGI is used for purposes of this computation. Individuals with more than $28,000 of AGI are entitled to a credit equal to 20 percent of allowable employment-related expenses.
House Bill
Dollar limits
Under the House bill, the dollar limits on eligible employment-related expenses ($2,400 if there is one qualifying individual and $4,800 if there are two or more qualifying individuals) are indexed for inflation.
Phaseout
For taxpayers with modified AGI in excess of certain thresholds, the sum of the otherwise allowable child credit and the otherwise allowable dependent care credit is phased out. The phaseout rate is $25 for each $1,000 of modified AGI (or fraction thereof) in excess of the threshold. The reduction is applied first to the child credit and then to the dependent care credit. For married taxpayers filing joint returns, the threshold is $110,000. For taxpayers filing single or head of household returns, the threshold is $75,000. For married taxpayers filing separate returns, the threshold is $55,000. These thresholds are not indexed for inflation. (See above the description of the phaseout in the child tax credit.)
Effective date
The provision is effective for taxable years beginning after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill provision.
D. Tax Credit for Employer Expenses for Child Care Facilities (sec. 103 of the Senate amendment)
Present Law
Ordinary and necessary business expenses are deductible by an employer.
House Bill
No provision.
Senate Amendment
The Senate amendment provides a tax credit equal to 50 percent of an employers' qualified child care expenses for the taxable year. The maximum credit allowable cannot exceed $150,000 per year.
Qualified child care expenses are any amounts paid or incurred: (1) to acquire, construct, rehabilitate or expand property which is to be used as part of a qualified child care facility, with respect to which a deduction for depreciation is allowable, and which is not part of the principal residence of the taxpayer or an employee of the taxpayer; (2) for the operating costs of a qualified child care facility; (3) under a contract with a qualified child care facility to provide child care services to employees of the taxpayer; (4) under a contract to provide child care resource and referral services to employees of the taxpayer; or (5) for the costs of seeking accreditation for a child care facility. A qualified child care facility is a facility the principal use of which is to provide child care assistance and which meets the requirements of all applicable laws and regulations of the State and local government in which it is located. A facility is not a qualified child care facility unless enrollment in the facility is open to employees of the taxpayer during the year, the facility is not the principal trade or business of the taxpayer (unless at least 30 percent of the enrolled are dependents of employees of the taxpayer) and the use of (or eligibility to use) the facility does not discriminate in favor of highly compensated employees.
A recapture of the credit applies if the facility ceases to operate as a qualified child care facility or the facility is disposed of.
No deduction or credit is allowed under any other provision with respect to the amount of credit determined under this provision. The taxpayer's basis in property is reduce by the amount of credit determined with respect to such property.
Effective date.--The provision is effective with respect to taxable years beginning after December 31, 1997, but before January 1, 2000.
Conference Agreement
The conference agreement does not include the Senate amendment.
E. Expansion of Coordinated Enforcement Efforts Between the Internal Revenue Service and the Health and Human Services Office of Child Support Enforcement (sec. 104 of the Senate amendment)
Present Law
The Internal Revenue Service (IRS) and various Federal departments and agencies have information sharing agreements. The Secretary of Health and Human Services (HHS) has been directed to create and maintain various data bases which may be used by the IRS to collect, unpaid child support amounts, to administer the earned income credit and to verify a claim with respect to employment on a tax return.
House Bill
No provision.
Senate Amendment
The Senate amendment gives the IRS expanded access to information in the National Directory of New Hires to verify any information which is required on a tax return. It also gives the IRS access to the names and social security numbers of custodial parents in the Federal Case Registry of Child Support Orders. This information is made available to administer the Internal Revenue Code provisions which grant tax benefits based on the support and residence of dependent children.
Effective date.--The provision is effective on October 1, 1997.
Conference Agreement
The conference agreement does not include the Senate amendment.
F. Penalty-Free Withdrawals from IRAs for Adoption Expenses (sec. 105 of the Senate amendment)
Present Law
Under present law, amounts held in an individual retirement arrangement (IRA) are includible in income when withdrawn (except to the extent the withdrawal is a return of nondeductible contributions). Amounts withdrawn prior to attainment of age 59-1/2 are subject to an additional 10-percent early withdrawal tax, unless the withdrawal is due to death or disability, is made in the form of certain periodic payments, is used to pay medical expenses in excess of 7.5 percent of AGI, or is used to purchase health insurance of an unemployed individual.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that the 10-percent early withdrawal tax does not apply to distributions from IRAs that are not in excess of $2,000 if the taxpayer uses the amounts to pay qualified adoption expenses.
The penalty-free withdrawal is available for "qualified adoption expenses", meaning reasonable and necessary adoption fees, court costs, attorney fees, and other expenses which are directly related to, and the principal purpose of which is for, the legal adoption of an eligible child by the taxpayer. Qualified adoption expenses do not include expenses (1) incurred in violation of State or Federal law, (2) incurred in carrying out any surrogate parenting arrangement, (3) incurred in connection with the adoption of a child of a spouse, or (4) which are reimbursed under an employer program or otherwise.
Effective date.--The provision is effective for distributions after December 31, 1996.
Conference Agreement
The conference agreement does not include the Senate amendment.