SEC. 303. MARRIAGE PENALTY RELIEF FOR EARNED INCOME CREDIT; IBLE IN GROSS INCOME; SIMPLIFICATION OF EARNED (a) INCREASED PHASEOUT AMOUNT.— (1) IN GENERAL.-Section 32(b)(2) (relating to amounts) 26 USC 32. is amended (A) by striking "AMOUNTS.-The earned” and inserting "AMOUNTS. “(A) IN GENERAL.-Subject to subparagraph (B), the earned", and (B) by adding at the end the following new subparagraph: "(B) JOINT RETURNS.-In the case of a joint return filed by an eligible individual and such individual's spouse, the phaseout amount determined under subparagraph (A) shall be increased by "(i) $1,000 in the case of taxable years beginning in 2002, 2003, and 2004, “(ii) $2,000 in the case of taxable years beginning in 2005, 2006, and 2007, and "(iii) $3,000 in the case of taxable years beginning after 2007.". (2) INFLATION ADJUSTMENT.-Paragraph (1)(B) of section 32(j) (relating to inflation adjustments) is amended to read as follows: "(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined “(i) in the case of amounts in subsections (b)(2)(A) and (i)(1), by substituting 'calendar year 1995' for 'calendar year 1992' in subparagraph (B) thereof, and "(ii) in the case of the $3,000 amount in subsection (b)(2)(B)(iii), by substituting 'calendar year 2007' for 'calendar year 1992' in subparagraph (B) of such section 1.". (3) ROUNDING.-Section 32(j)(2)(A) (relating to rounding) is amended by striking "subsection (b)(2)" and inserting “subsection (b)(2)(A) (after being increased under subparagraph (B) thereof)". (b) EARNED INCOME TO INCLUDE ONLY AMOUNTS INCLUDIBLE IN GROSS INCOME.-Clause (i) of section 32(c)(2)(A) (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". (c) REPEAL OF REDUCTION OF CREDIT TO TAXPAYERS SUBJECT TO ALTERNATIVE MINIMUM TAX.-Section 32(h) is repealed. (d) REPLACEMENT OF MODIFIED ADJUSTED GROSS INCOME WITH ADJUSTED GROSS INCOME. (1) IN GENERAL.-Section 32(a)(2)(B) is amended by striking "modified". (2) CONFORMING AMENDMENTS.— (5). (A) Section 32(c) is amended by striking paragraph (B) Section 32(f)(2)(B) is amended by striking “modified" each place it appears. (e) RELATIONSHIP TEST. 26 USC 32. (1) IN GENERAL.-Clause (i) of section 32(c)(3)(B) (relating to relationship test) is amended to read as follows: "(i) IN GENERAL.-An individual bears a relationship to the taxpayer described in this subparagraph if such individual is "(I) a son, daughter, stepson, or stepdaughter, or a descendant of any such individual, "(II) a brother, sister, stepbrother, or stepsister, or a descendant of any such individual, who the taxpayer cares for as the taxpayer's own child, or "(III) an eligible foster child of the taxpayer.". (2) ELIGIBLE FOSTER CHILD.— (A) IN GENERAL.-Clause (iii) of section 32(c)(3)(B) is amended to read as follows: “(iii) ELIGIBLE FOSTER CHILD.-For purposes of clause (i), the term 'eligible foster child' means an individual not described in subclause (I) or (II) of clause (i) who "(I) is placed with the taxpayer by an authorized placement agency, and "(II) the taxpayer cares for as the taxpayer's own child." (B) CONFORMING AMENDMENT.-Section 32(c)(3)(A)(ii) is amended by striking "except as provided in subparagraph (B)(iii),”. (f) 2 OR MORE CLAIMING QUALIFYING CHILD.-Section 32(c)(1)(C) is amended to read as follows: "(C) 2 OR MORE CLAIMING QUALIFYING CHILD.— "(i) IN GENERAL.-Except as provided in clause (ii), if (but for this paragraph) an individual may be claimed, and is claimed, as a qualifying child by 2 or more taxpayers for a taxable year beginning in the same calendar year, such individual shall be treated as the qualifying child of the taxpayer who is “(I) a parent of the individual, or "(II) if subclause (I) does not apply, the taxpayer with the highest adjusted gross income for such taxable year. "(ii) MORE THAN 1 CLAIMING CREDIT.-If the parents claiming the credit with respect to any qualifying child do not file a joint return together, such child shall be treated as the qualifying child of— "(I) the parent with whom the child resided for the longest period of time during the taxable year, or "(II) if the child resides with both parents for the same amount of time during such taxable year, the parent with the highest adjusted gross income.". (g) 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.". (h) CLERICAL AMENDMENT.-Subparagraph (E) of section 32(c)(3) is amended by striking "subparagraphs (A)(ii) and 26 USC 32. (B)(iii)(II)” and inserting "subparagraph (A)(ii)”. (i) EFFECTIVE DATES. 26 USC 32 note. (1) IN GENERAL.-Except as provided in paragraph (2), the Applicability. amendments made by this section shall apply to taxable years beginning after December 31, 2001. (2) SUBSECTION (g).-The amendment made by subsection (g) shall take effect on January 1, 2004. TITLE IV-AFFORDABLE EDUCATION Subtitle A-Education Savings Incentives SEC. 401. MODIFICATIONS TO EDUCATION INDIVIDUAL RETIREMENT (a) MAXIMUM ANNUAL CONTRIBUTIONS. (1) IN GENERAL.-Section 530(b)(1)(A)(iii) (defining education individual retirement account) is amended by striking "$500" and inserting “$2,000". (2) CONFORMING AMENDMENT.-Section 4973(e)(1)(A) is amended by striking "$500" and inserting "$2,000". (b) MODIFICATION OF AGI LIMITS TO REMOVE MARRIAGE PENALTY.-Section 530(c)(1) (relating to reduction in permitted contributions based on adjusted gross income) is amended— (1) by striking "$150,000" in subparagraph (A)(ii) and inserting "$190,000", and (2) by striking "$10,000” in subparagraph (B) and inserting "$30,000". (c) TAX-FREE EXPENDITURES FOR ELEMENTARY AND SECONDARY SCHOOL EXPENSES. (1) IN GENERAL.-Section 530(b)(2) (defining qualified higher education expenses) is amended to read as follows: “(2) QUALIFIED EDUCATION EXPENSES.— "(A) IN GENERAL.-The term 'qualified education expenses' means “(i) qualified higher education expenses (as defined in section 529(e)(3)), and “(ii) qualified elementary and secondary education expenses (as defined in paragraph (4)). “(B) QUALIFIED STATE TUITION PROGRAMS.-Such term shall include any contribution to a qualified State tuition program (as defined in section 529(b)) on behalf of the designated beneficiary (as defined in section 529(e)(1)); but there shall be no increase in the investment in the contract for purposes of applying section 72 by reason of any portion of such contribution which is not includible in gross income by reason of subsection (d)(2).". 26 USC 530. Regulations. (2) QUALIFIED ELEMENTARY AND SECONDARY EDUCATION EXPENSES.--Section 530(b) (relating to definitions and special rules) is amended by adding at the end the following new paragraph: "(4) QUALIFIED ELEMENTARY AND SECONDARY EDUCATION EXPENSES. “(A) IN GENERAL.-The term 'qualified elementary and secondary education expenses' means "(i) expenses for tuition, fees, academic tutoring, special needs services in the case of a special needs beneficiary, books, supplies, and other equipment which are incurred in connection with the enrollment or attendance of the designated beneficiary of the trust as an elementary or secondary school student at a public, private, or religious school, "(ii) expenses for room and board, uniforms, transportation, and supplementary items and services (including extended day programs) which are required or provided by a public, private, or religious school in connection with such enrollment or attendance, and "(iii) expenses for the purchase of any computer technology or equipment (as defined in section 170(e)(6)(F)(i)) or Internet access and related services, if such technology, equipment, or services are to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in school. Clause (iii) shall not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. "(B) SCHOOL.-The term 'school' means any school which provides elementary education or secondary education (kindergarten through grade 12), as determined under State law.". (3) CONFORMING AMENDMENTS.-Section 530 is amended— (A) by striking "higher" each place it appears in subsections (b)(1) and (d)(2), and (B) by striking "HIGHER" in the heading for subsection (d)(2). (d) WAIVER OF AGE LIMITATIONS FOR CHILDREN WITH SPECIAL NEEDS.-Section 530(b)(1) (defining education individual retirement account) is amended by adding at the end the following flush sentence: "The age limitations in subparagraphs (A)(ii) and (E), and paragraphs (5) and (6) of subsection (d), shall not apply to any designated beneficiary with special needs (as determined under regulations prescribed by the Secretary).". (e) ENTITIES PERMITTED TO CONTRIBUTE TO ACCOUNTS.-Section 530(c)(1) (relating to reduction in permitted contributions based on adjusted gross income) is amended by striking "The maximum amount which a contributor" and inserting "In the case of a contributor who is an individual, the maximum amount the contributor". (f) TIME WHEN CONTRIBUTIONS DEEMED MADE.— (1) IN GENERAL.-Section 530(b) (relating to definitions and special rules), as amended by subsection (c)(2), is amended by adding at the end the following new paragraph: “(5) TIME WHEN CONTRIBUTIONS DEEMED MADE.-An individual shall be deemed to have made a contribution to an education individual retirement account on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).". (2) EXTENSION OF TIME TO RETURN EXCESS CONTRIBUTIONS.-Subparagraph (C) of section 530(d)(4) (relating to addi- 26 USC 530. tional tax for distributions not used for educational expenses) is amended (A) by striking clause (i) and inserting the following new clause: "(i) such distribution is made before the first day of the sixth month of the taxable year following the taxable year, and”, and (B) by striking "DUE DATE OF RETURN" in the heading and inserting "CERTAIN DATE”. (g) COORDINATION WITH HOPE AND LIFETIME LEARNING CREDITS AND QUALIFIED TUITION PROGRAMS. (1) IN GENERAL.-Section 530(d)(2)(C) is amended to read as follows: "(C) COORDINATION WITH HOPE AND LIFETIME LEARNING CREDITS AND QUALIFIED TUITION PROGRAMS.-For purposes of subparagraph (A)— "(i) CREDIT COORDINATION.-The total amount of qualified higher education expenses with respect to an individual for the taxable year shall be reduced"(I) as provided in section 25A(g)(2), and "(II) by the amount of such expenses which were taken into account in determining the credit allowed to the taxpayer or any other person under section 25A. "(ii) COORDINATION WITH QUALIFIED TUITION PROGRAMS.-If, with respect to an individual for any taxable year “(I) the aggregate distributions during such year to which subparagraph (A) and section 529(c)(3)(B) apply, exceed "(II) the total amount of qualified education the taxpayer shall allocate such expenses among such (2) CONFORMING AMENDMENTS.— (A) Subsection (e) of section 25A is amended to read as follows: "(e) ELECTION NOT TO HAVE SECTION APPLY.-A taxpayer may elect not to have this section apply with respect to the qualified tuition and related expenses of an individual for any taxable year.". (B) Section 135(d)(2)(A) is amended by striking "allowable" and inserting “allowed". (C) Section 530(d)(2)(D) is amended— (i) by striking "or credit" and inserting ", credit, or exclusion", and |