I
109th CONGRESS
1st Session
H. R. 2950
IN THE HOUSE OF REPRESENTATIVES
June 16, 2005
Mr. Neal of Massachusetts introduced the following bill; which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to provide a revenue-neutral simplification of the individual income tax.
Short title
Short title
This Act may be cited as the Individual Tax Simplification Act of 2005
.
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.
Table of contents
Sec. 1. Short title
Title I—Simplification relating to nonrefundable personal credits
Sec. 101. Repeal of interaction with alternative minimum tax
Sec. 102. Uniform phaseout of credits for adoption, children, and education
Title II—Simplification of capital gains tax
Sec. 201. Simplification of capital gains tax
Title III—Repeal of certain hidden marginal rate increases; repeal of individual minimum tax
Subtitle A—Repeals
Sec. 301. Repeal of overall limitation on itemized deductions
Sec. 302. Repeal of phaseout of personal exemptions
Sec. 303. Repeal of alternative minimum tax on individuals
Subtitle B—Revenue Offsets
Sec. 311. Additional income tax
Simplification relating to nonrefundable personal credits
Repeal of interaction with alternative minimum tax
General rule
Subsection (a) of section 26 (relating to limitation based on amount of tax) is amended to read as follows:
Limitation based on amount of tax
The aggregate amount of credits allowed by this subpart for the taxable year shall not exceed the tax imposed by this chapter for the taxable year.
.
Conforming amendments
Paragraph (2) of section 26(b) is amended by inserting subsection (a) and
before paragraph (1)
.
Section 23 is amended—
in subsection (b) by striking paragraph (4), and
in subsection (c) by striking subsection (b)(4) for such taxable year
and inserting section 26(a) for such taxable year reduced by the sum of the credits allowable under this subpart (other than this section and sections 24 and 1400C)
.
Section 24 is amended—
in subsection (b) by striking paragraph (3), and
in subsection (d)(1) by striking subsection (b)(3)
each place it appears and inserting section 26(a)
.
Section 25B is amended by striking subsection (g) and redesignating subsection (h) as subsection (g).
Section 904(i) is amended by striking 2004, or 2005
and inserting or 2004
.
Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2005.
Uniform phaseout of credits for adoption, children, and education
In general
Section 26 is amended by redesignating subsections (b) and (c) as subsections (c) and (d), respectively, and by inserting after subsection (a) the following new subsection:
Uniform phaseout of adoption expense credit, child credit, and hope and lifetime learning credits
In general
The aggregate amount which would (but for subsection (a) and this subsection) be allowed as a credit under sections 23, 24, and 25A shall be reduced (but not below zero) by 10 percent of the amount by which the taxpayer’s modified adjusted gross income exceeds the threshold amount. For purposes of the preceding sentence, the term modified adjusted gross income means adjusted gross income increased by any amount excluded from gross income under section 911, 931, or 933.
Threshold amount
For purposes of paragraph (1), the term threshold amount means—
$110,000 in the case of a joint return,
$75,000 in the case of an individual who is not married, and
$55,000 in the case of a married individual filing a separate return.
.
Conforming amendments
Paragraph (2) of section 23(b) is amended to read as follows:
Limitation based on adjusted gross income
For limitation based on adjusted gross income, see section 26(b).
.
Subsection (c) of section 23 is amended—
by inserting (as reduced under section 26(b))
before exceeds
, and
by adding at the end the following new sentence: For purposes of this subsection, the reduction under section 26(b) shall first be applied to the credits under sections 24 and 25A and then to the credit under this section.
.
Subsection (b) of section 24 is amended to read as follows:
Limitation based on adjusted gross
For limitation based on adjusted gross income, see section 26(b).
.
Subsection (d) of section 25A is amended to read as follows:
Limitation based on adjusted gross
For limitation based on adjusted gross income, see section 26(b).
.
Subsection (h) of section 25A is amended to read as follows:
Inflation adjustments
In general
In the case of a taxable year beginning after 2006, each of the $1,000 amounts under subsection (b)(1) 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, determined by substituting calendar year 2005
for calendar year 1992
in subparagraph (B) thereof.
Rounding
If any amount as adjusted under paragraph (1) is not a multiple of $100, such amount shall be rounded to the next lowest multiple of $100.
.
The section heading for section 26 is amended by inserting before the period ; phaseout of certain credits based on income; definitions
.
The item relating to section 26 in the table of sections for subpart A of part IV of subchapter A of chapter 1 is amended by inserting before the period ; phaseout of certain credits based on income; definitions
.
Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2005.
Simplification of capital gains tax
Simplification of capital gains tax
In general
Part I of subchapter P of chapter 1 (relating to treatment of capital gains) is amended by adding at the end the following new section:
Capital gains deduction
If for any taxable year a taxpayer other than a corporation has a net capital gain, 38 percent of such gain shall be a deduction from gross income.
.
Deduction allowable whether or not taxpayer itemizes other deductions
Subsection (b) of section 63 is amended by striking and
at the end of paragraph (1), by striking the period at the end of paragraph (2) and inserting , and
, and by adding at the end the following new paragraph:
the deduction allowed by section 1203.
.
Subsection (d) of section 63 is amended by striking and
at the end of paragraph (1), by striking the period at the end of paragraph (2) and inserting , and
, and by adding at the end the following new paragraph:
the deduction allowed by section 1203.
.
Treatment of collectibles
In general
Section 1222 is amended by inserting after paragraph (11) the following new paragraph:
Special rule for collectibles
In general
Any gain or loss from the sale or exchange of a collectible shall be treated as a short-term capital gain or loss (as the case may be), without regard to the period such asset was held. The preceding sentence shall apply only to the extent the gain or loss is taken into account in computing taxable income.
Treatment of certain sales of interests in partnerships, etc
For purposes of subparagraph (A), any gain from the sale or exchange of an interest in a partnership, S corporation, or trust which is attributable to unrealized appreciation in the value of collectibles held by such entity shall be treated as gain from the sale or exchange of a collectible. Rules similar to the rules of section 751(f) shall apply for purposes of the preceding sentence.
Collectible
For purposes of this paragraph, the term collectible means any capital asset which is a collectible (as defined in section 408(m) without regard to paragraph (3) thereof).
.
Charitable deduction not affected
Paragraph (1) of section 170(e) is amended by adding at the end thereof the following new sentence: For purposes of this paragraph, section 1222 shall be applied without regard to paragraph (12) thereof (relating to special rule for collectibles).
.
Clause (iv) of section 170(b)(1)(C) is amended by inserting before the period at the end thereof the following: and section 1222 shall be applied without regard to paragraph (12) thereof (relating to special rule for collectibles)
.
Technical and conforming changes
Section 1 is amended by striking subsection (h).
Section 163(d)(4) is amended—
by striking the last sentence of subparagraph (B), and
by amending subparagraph (E) to read as follows:
Coordination with capital gains deduction
The net capital gain taken into account under section 1203 for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under subparagraph (B)(iii) for such year.
.
Paragraph (1) of section 170(e) is amended by striking the amount of gain
in the material following subparagraph (B)(ii) and inserting 62 percent (100 percent in the case of a corporation) of the amount of gain
.
Subparagraph (B) of section 172(d)(2) is amended to read as follows:
the exclusion under section 1202 and the deduction under section 1203 shall not be allowed.
.
The last sentence of section 453A(c)(3) is amended by striking all that follows long-term capital gain,
and inserting the maximum rate on net capital gain under section 1201 or the deduction under section 1203 (whichever is appropriate) shall be taken into account.
.
Section 641(c)(2)(A) is amended by striking Except as provided in section 1(h), the
and inserting The
.
Section 641(c)(2)(C) is amended by inserting after clause (iii) the following new clause:
The deduction under section 1203.
.
Paragraph (4) of section 642(c) is amended to read as follows:
Adjustments
To the extent that the amount otherwise allowable as a deduction under this subsection consists of gain from the sale or exchange of capital assets held for more than 1 year, proper adjustment shall be made for any exclusion allowable under section 1202 and any deduction allowable under section 1203 to the estate or trust. In the case of a trust, the deduction allowed by this subsection shall be subject to section 681 (relating to unrelated business income).
.
Section 642 is amended by adding at the end the following new subsection:
Capital gains deduction
The deduction under section 1203 to an estate or trust shall be computed by excluding the portion (if any) of the gains for the taxable year which is includible by the income beneficiaries under sections 652 and 662 (relating to inclusions of amounts in gross income of beneficiaries of trusts) as gain derived from the sale or exchange of capital assets.
.
The last sentence of section 643(a)(3) is amended to read as follows: The exclusion under section 1202 and the deduction under section 1203 shall not be taken into account.
.
Subparagraph (C) of section 643(a)(6) is amended by inserting (i)
before there shall
and by inserting before the period , and (ii) the deduction under section 1203 (relating to capital gains deduction) shall not be taken into account
.
Paragraph (4) of section 691(c) is amended by striking 1(h),
and by inserting 1203,
after 1202,
.
The second sentence of paragraph (2) of section 871(a) is amended by striking section 1202
and inserting sections 1202 and 1203
.
Paragraph (2) of section 904(b) is amended by striking subparagraphs (A) and (C), by redesignating subparagraph (B) as subparagraph (A), and by inserting after subparagraph (A) (as so redesignated) the following new subparagraph:
Other taxpayers
In the case of a taxpayer other than a corporation, taxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only to the extent of foreign source capital gain net income.
.
Subparagraph (A) of section 904(b)(2), as so redesignated, is amended—
by striking all that precedes clause (i) and inserting the following:
Corporations
In the case of a corporation—
, and
by striking in clause (i) in lieu of applying subparagraph (A),
.
Paragraph (3) of section 904(b) is amended by striking subparagraphs (D) and (E) and inserting the following new subparagraph:
Rate differential portion
The rate differential portion of foreign source net capital gain, net capital gain, or the excess of net capital gain from sources within the United States over net capital gain, as the case may be, is the same proportion of such amount as the excess of the highest rate of tax specified in section 11(b) over the alternative rate of tax under section 1201(a) bears to the highest rate of tax specified in section 11(b).
.
Paragraph (1) of section 1402(i) is amended by inserting , and the deduction provided by section 1203 shall not apply
before the period at the end thereof.
Paragraph (1) of section 1445(e) is amended by striking 15 percent
and inserting 24.5 percent
.
The second sentence of section 7518(g)(6)(A) is amended—
by striking during a taxable year to which section 1(h) or 1201(a) applies
, and
by striking 15 percent
and inserting 24.5 percent
.
The second sentence of section 607(h)(6)(A) of the Merchant Marine Act, 1936, is amended—
by striking during a taxable year to which section 1(h) or 1201(a) of such Code applies
, and
by striking 15 percent
and inserting 24.5 percent
.
Clerical amendment
The table of sections for part I of subchapter P of chapter 1 is amended by adding at the end the following new item:
Sec. 1203. Capital gains deduction
.
Effective dates
In general
Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2005.
Withholding
The amendments made by subsection (d)(15) shall apply only to amounts paid after December 31, 2005.
Coordination with prior transition rule
Any amount treated as long-term capital gain by reason of paragraph (3) of section 1122(h) of the Tax Reform Act of 1986 shall not be taken into account for purposes of applying section 1203 of the Internal Revenue Code of 1986 (as added by this section).
Repeal of certain hidden marginal rate increases; repeal of individual minimum tax
Repeals
Repeal of overall limitation on itemized deductions
In general
Section 68 (relating to overall limitation on itemized deductions) is hereby repealed.
Conforming amendments
Subparagraph (A) of section 1(f)(6) is amended by striking section 68(b)(2)
.
Paragraph (1) of section 56(b) is amended by striking subparagraph (F).
Subclause (III) of section 164(b)(5)(H)(ii) is amended by striking section 68(b))
and inserting , as in effect on the date of the enactment of the Individual Tax Simplification Act of 2005)
.
Subparagraph (B) of section 773(a)(3) is amended by striking clause (i) and by redesignating clauses (ii), (iii), and (iv), as clauses (i), (ii), and (iii), respectively.
The table of sections for subchapter B of chapter 1 is amended by striking the item relating to section 68.
Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2005.
Repeal of phaseout of personal exemptions
In general
Subsection (d) of section 151 (relating to allowance of deductions for personal exemptions) is amended by striking paragraph (3) and by redesignating paragraph (4) as paragraph (3).
Conforming amendments
Paragraph (6) of section 1(f) is amended—
by striking section 151(d)(4)
in subparagraph (A) and inserting section 151(d)(3)
, and
by striking section 151(d)(4)(A)
in subparagraph (B) and inserting section 151(d)(3)
.
Paragraph (3) of section 151(d), as redesignated by subsection (a), is amended to read as follows:
Inflation adjustment
In the case of any taxable year beginning in a calendar year after 1989, the dollar amount contained in paragraph (1) 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 1988
for calendar year 1992
in subparagraph (B) thereof.
.
Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2005.
Repeal of alternative minimum tax on individuals
In general
Subsection (a) of section 55 (relating to alternative minimum tax imposed) is amended by adding at the end the following new flush sentence:
Except in the case of a corporation, no tax shall be imposed by this section for any taxable year beginning after December 31, 2005, and the tentative minimum tax of any taxpayer other than a corporation shall be zero for purposes of this title.
.
Conforming amendments
Subparagraph (B) of section 1(g)(7) is amended by adding and
at the end of clause (i), by striking , and
at the end of clause (ii) and inserting a period, and by striking clause (iii).
Section 2(d) is amended by striking sections 1 and 55
and inserting section 1
.
Section 5(a) is amended by striking paragraph (4).
Subsection (d) of section 26 (as redesignated by section 102) is amended by inserting before the period ; except that such amount shall be treated as being zero in the case of a taxpayer other than a corporation
.
Paragraph (6) of section 29(b) is amended to read as follows:
Application with other credits
The credit allowed by subsection (a) for any taxable year shall not exceed the regular tax for the taxable year reduced by the sum of the credits allowable under subpart A and section 27. In the case of a corporation, the limitation under the preceding sentence shall be reduced (but not below zero) by the tentative minimum tax for the taxable year.
.
Paragraph (3) of section 30(b) is amended to read as follows:
Application with other credits
The credit allowed by subsection (a) for any taxable year shall not exceed the regular tax for the taxable year reduced by the sum of the credits allowable under subpart A and sections 27 and 29. In the case of a corporation, the limitation under the preceding sentence shall be reduced (but not below zero) by the tentative minimum tax for the taxable year.
.
Subsection (d) of section 53 is amended to read as follows:
Definitions
For purposes of this section—
Net minimum tax
The term net minimum tax means the tax imposed by section 55 increased by the amount of the credit not allowed under section 29 (relating to credit for producing fuel from a nonconventional source) solely by reason of the application of the last sentence of section 29(b)(6), or not allowed under section 30 solely by reason of the application of the last sentence of section 30(b)(3).
Tentative minimum tax
The term tentative minimum tax has the meaning given to such term by section 55(b); except that such tax shall be treated as being zero in the case of a taxpayer other than a corporation.
.
Subsection (b) of section 55 (relating to alternative minimum tax imposed) is amended to read as follows:
Tentative minimum tax
For purposes of this part—
Amount of tentative tax
The tentative minimum tax for the taxable year is—
20 percent of so much of the alternative minimum taxable income for the taxable year as exceeds the exemption amount, reduced by
the alternative minimum tax foreign tax credit for the taxable year.
Alternative minimum taxable income
The term alternative minimum taxable income means the taxable income of the taxpayer for the taxable year—
determined with the adjustments provided in section 56, and
increased by the amount of the items of tax preference described in section 57.
.
Subsection (d) of section 55 is amended to read as follows:
Exemption amount
For purposes of this section—
In general
The term exemption amount means $40,000.
Phase-out of exemption amount
The exemption amount of any taxpayer shall be reduced (but not below zero) by an amount equal to 25 percent of the amount by which the alternative minimum taxable income of the taxpayer exceeds $150,000.
.
Paragraph (6) of section 56(a) is amended to read as follows:
Adjusted basis
The adjusted basis of any property to which paragraph (1) or (5) applies (or with respect to which there are any expenditures to which paragraph (2) applies) shall be determined on the basis of the treatment prescribed in paragraph (1), (2), or (5), whichever applies.
.
Section 56 is amended by striking subsection (b).
Subsection (c) of section 56 is amended by striking so much of the subsection as precedes paragraph (1), by redesignating paragraphs (1), (2), and (3) as paragraphs (8), (9), and (10), respectively, and moving them to the end of subsection (a).
Paragraph (8) of section 56(a), as redesignated by subparagraph (C), is amended by striking subsection (g)
and inserting subsection (c)
.
Section 56 is amended by striking subsection (e) and by redesignating subsections (d) and (g) as subsections (b) and (c), respectively.
Section 58 is hereby repealed.
Clause (i) of section 56(b)(2)(A) (as redesignated by subparagraph (E), is amended by inserting , in the case of taxable years beginning before January 1, 2006,
before section 58
.
Subsection (h) of section 59 is amended—
by striking , 465, and 1366(d)
and inserting and 465
, and
by striking 56, 57, and 58
and inserting 56 and 57
.
Subparagraph (C) of section 59(a)(1) is amended by striking subparagraph (A)(i) or (B)(i) of section 55(b)(1) (whichever applies)
and inserting section 55(b)(1)(A)
.
Paragraph (3) of section 59(a) is amended to read as follows:
Pre-credit tentative minimum tax
For purposes of this subsection, the term pre-credit tentative minimum tax means the amount determined under section 55(b)(1)(A).
.
Section 59 is amended by striking subsection (c).
Section 59 is amended by striking subsection (j).
Paragraph (7) of section 382(l) is amended by striking section 56(d)
and inserting section 56(b)
.
Paragraph (2) of section 641(c) is amended by striking subparagraph (B) and by redesignating subparagraphs (C) and (D) as subparagraphs (B) and (C), respectively.
Subsections (b) and (c) of section 666 are each amended by striking (other than the tax imposed by section 55)
.
Subsections (c)(5) and (d)(3)(B) of section 772 are each amended by striking 56, 57, and 58
and inserting 56 and 57
.
Sections 847(9) and 848(i) are each amended by striking section 56(g)
and inserting section 56(c)
.
Sections 871(b)(1) and 877(b) are each amended by striking or 55
.
Subsection (a) of section 897 is amended to read as follows:
General rule
For purposes of this title, gain or loss of a nonresident alien individual or a foreign corporation from the disposition of a United States real property interest shall be taken into account—
in the case of a nonresident alien individual, under section 871(b)(1), or
in the case of a foreign corporation, under section 882(a)(1),
.
Paragraph (1) of section 962(a) is amended by striking sections 1 and 55
and inserting section 1
.
Paragraph (1) of section 1397E(c) is amended to read as follows:
the regular tax liability (as defined in section 26(b), over
.
The last sentence of section 1561(a) is amended by striking section 55(d)(3)
and inserting section 55(d)(2)
.
Subparagraph (B) of section 6015(d)(2) is amended by striking or 55
.
Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2005.
Transitional rule relating to minimum tax credit
In general
The pre-effective date minimum tax credit of a taxpayer other than a corporation shall not be allowed under section 53 of the Internal Revenue Code of 1986 but shall be allowed under this subsection.
Pre-effective date minimum tax credit
For purposes of this subsection, the term pre-effective date minimum tax credit means the amount determined under section 53(b) of such Code for the first taxable year beginning after December 31, 2005.
Amount of credit
In general
The pre-effective date minimum tax credit of a taxpayer other than a corporation shall be allowed ratably over the period of 10 taxable years beginning with the first taxable year beginning after December 31, 2005.
Limitation
The credit allowable by this subsection for any taxable year shall not exceed the regular tax liability of the taxpayer for such taxable year reduced by the sum of the credits allowable under subparts A, B, D, E, and F of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986.
Carryforward
If the credit allowable by this subsection exceeds the limitation imposed by subparagraph (B), such excess shall be carried to the succeeding taxable year and added to the credit allowable under this subsection for such succeeding taxable year.
Acceleration of credit where previously taxed income
In general
The credit allowed under this subsection for any taxable year shall not be less than so much of the limitation described in paragraph (3)(B) for the taxable year as is attributable to previously taxed incentive stock option gain. Proper adjustments shall be made in the amount allowed under this subsection for subsequent taxable years to take into account any increased credit allowed by reason of this paragraph.
Incentive stock option gain
For purposes of subparagraph (A), the term previously taxed incentive stock option gain means the amount of gain recognized during the taxable year on account of the disposition of stock acquired by exercising an incentive stock option (as defined in section 422 of such Code) to the extent such gain does not exceed the amount of gain previously taken into account by reason of section 56(b)(3) of such Code (as in effect on the day before the date of the enactment of this Act) with respect to such option.
Definitions
Terms used in this subsection which are also used in section 53 of such Code shall have the respective meanings given to such terms by such section 53.
Revenue offsets
Additional income tax
In general
Section 1 is amended by adding at the end the following new subsection:
Additional income tax
In general
If the adjusted gross income of an individual exceeds the initial threshold amount, the tax imposed by this section (determined without regard to this subsection) shall be increased by an amount equal to the sum of—
the applicable rate of so much of the adjusted gross income as exceeds the initial threshold amount but does not exceed the second threshold amount, and
twice the applicable rate of so much of the adjusted gross income as exceeds the second threshold amount.
Applicable rate
For purposes of this section, the applicable rate is the rate estimated by the Secretary which will result in the Individual Tax Simplification Act of 2005 being revenue neutral over the first 10 years after its enactment.
Threshold amounts
For purposes of this subsection—
Initial threshold amount
The initial threshold amount is—
$120,000 in the case of a joint return,
$90,000 in the case of an individual who is not married, and
1/2 the dollar amount applicable under clause (i) in the case of a married individual filing a separate return.
Second threshold amount
The second threshold amount is—
$150,000 in the case of a joint return,
$112,000 in the case of an individual who is not married, and
1/2 the dollar amount applicable under clause (i) in the case of a married individual filing a separate return.
Marital status
For purposes of this paragraph, marital status shall be determined under section 7703.
Inflation adjustment
In the case of any taxable year beginning in a calendar year after 2006, each dollar amount contained in paragraph (2) shall be increased by an amount equal to—
such dollar amount, multiplied by
the cost-of-living adjustment determined under subsection (f)(3) for the calendar year in which the taxable year begins, by substituting calendar year 2005
for calendar year 1992
in subparagraph (B) thereof.
Tax not to apply to estates and trusts
This subsection shall not apply to an estate or trust.
.
Effective date
The amendment made by this section shall apply to taxable years beginning after December 31, 2005.
Section 15 not to apply
The amendment made by this section shall not be treated as a change in a rate of tax for purposes of section 15 of such Code.