ing allowance tables which take into account tax credits to which employees are entitled. It is intended that these tables may take into account the credit for child care expenses, the new tax credit for the elderly, and such other tax credits as the Secretary may find appropriate. Because the credit for child care expenses is 20 percent of the eligible expenses, the tables may be designed to reflect the approximate tax value of the credit rather than the total expenses (as is the case with itemized deductions) to make the withholding change closely approximate the reduction in tax liability. (Similarly, the full amount of the tax credit for the elderly might not be reflected in such tables, particularly where the income phaseout is operative.) It is estimated that the number of returns benefiting from the child care provision will approximately double from about 2 million to nearly 4 million. Of the 4 million, approximately 3 million will benefit compared to prior law and about 1 million will lose relatively small amounts because of the change from an itemized deduction to a 20percent credit. Effective date This provision is to apply to taxable years beginning after December 31, 1975. Revenue effect This provision will reduce tax receipts by $384 million in fiscal year 1977, $368 million in fiscal year 1978, and $488 million in fiscal year 1981. 5. Sick Pay and Certain Military, etc. Disability Pensions (sec. 505 of the Act and secs. 104 and 105 of the Code) a. Sick Pay Prior law Under prior law, gross income did not include amounts received under wage continuation plans when an employee was "absent from work" on account of personal injuries or sickness. The payments that were received when an employee was absent from work were generally referred to as "sick pay" (under sec. 105 (d)). The proportion of salary covered by the wage continuation payments and any hospitalization of the taxpayer determined whether or not there was a waiting period before the exclusion applied. If the sick pay was more than 75 percent of the regular weekly rate, the waiting period before the exclusion became available was 30 days whether or not the taxpayer was hospitalized during the period. If the rate of sick pay was 75 percent or less of the regular weekly rate and the taxpayer was not hospitalized during the period, the waiting period was 7 days. If the sick pay was 75 percent or less of the regular weekly rate and the taxpayer was hospitalized for at least 1 day during the period, there was no waiting period and the sick pay exclusion applied immediately. In no case could the amount of "sick pay" exclusion exceed $75 a week for the first 30 days and $100 a week after the first 30 days. During the period that a retired employee was entitled to the sick pay exclusion, he could not recover any of his contributions toward any annuity under section 72.1 1 Reg. sec. 1.72-15 (b) and (c) (2) and 1.72–4 (b) (2) (iv). Reasons for change Section 105 (d), which provided the exclusion for "sick pay," was extremely complex. The provision's complexity required a separate 28line tax form which was so difficult that many taxpayers had to obtain professional assistance in order to complete it and avail themselves of the exclusion. The Congress believed that elimination of the complexity in this area was imperative. In addition, the sick pay provision caused some inequities in the tax treatment of sick employees compared to working ones and the treatment of lower-income taxpayers compared to those with higher incomes. Excluding "sick pay" payments (received in lieu of wages) from income when an employee was absent from work, while taxing the same payments if inade as wages while he was at work, was not justified. A working employee generally incurs some costs of earning income not incurred by a sick employee who stays at home. The latter may incur additional medical expenses on account of his sickness, but he may deduct such medical expenses if they exceed the percentage of income limitations. Under prior law, low- and middle-income taxpayers received on a percentage basis less benefit from the sick pay exclusion than did taxpayers in higher marginal tax brackets because of the progressivity of tax rates. Taxpayers who received no sick pay, of course, received no benefit at all. The Congress believed that the exclusion allowed under section 105 should not have a regressive effect and that the provision should direct a fairer share of its tax benefits to low- and middleincome taxpayers. Explanation of provision The Act repeals the prior sick pay exclusion and continues the maximum exclusion of $100 a week ($5,200 a year) only for taxpayers under age 65 who have retired on disability and are permanently and totally disabled. For this purpose permanently and totally disabled means unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. A taxpayer is considered to be "retired" even if not formally placed on retirement but receiving some other form of income in lieu of wages, such as accumulated leave, provided he is not expected to return to work. The Congress expects that proof of disability must be substantiated by the taxpayer's employer, who is to certify this status under procedures approved in advance by the Internal Revenue Service. The Service may also issue regulations requiring the taxpayer to provide proof from time to time that he is disabled. If, at the time an individual retires on disability, a qualified physician is not certain that the retiree's disability will in fact be permanent, the Service may accept subsequent evidence that his disability was permanent and qualified him as of the time of his retirement for this provision. (At age 65, taxpayers become ineligible for this exclusion but are entitled to claim the revised elderly credit.) The maximum amount excludable is to be reduced on a dollar-fordollar basis by the taxpayer's adjusted gross income (including disability income) in excess of $15,000. Thus, if a taxpayer receives $5,200 in disability income and $15,000 (or more) in other income which together equal $20,200 (or more), he would not be entitled to any exclusion of his disability payments. In order to claim this exclusion, a taxpayer who is married at the close of a taxable year must file a joint return with his or her spouse, unless they have lived apart at all times during that year. Each spouse is entitled to a separate, maximum $5,200 exclusion, but the phaseout for adjusted gross income in excess of $15,000 applies on a per-return basis. The Act also provides a transitional rule allowing persons who, before January 1, 1976, retired on disability or who were entitled to retire on disability, and on January 1, 1976, were permanently and totally disabled (though they may not have been permanently and totally disabled on their retirement date) to claim a disability income exclusion if they otherwise qualify. Another transitional rule allows taxpayers who retired on disability before January 1, 1976, and who were entitled to a sick pay exclusion on December 31, 1975, also to benefit from the section 72 annuity exclusion before age 65, if they make an irrevocable election not to claim the disability exclusion. The Act provides that when a taxpayer reaches age 65, he can begin to recover his investment in an annuity contract (if any) under section 72. A special rule enables certain permanently and totally disabled taxpayers who determine that they will not be able to claim any (or little) sick pay exclusion to benefit from the section 72 exclusion before age 65. Under this rule, the taxpayer may make an irrevocable election not to seek the benefits of the disability income exclusion for that year or subsequent years.2 The new rules apply both to civilians and to military personnel. However, Veterans Administration payments remain completely exempt from tax. Effective date This provision applies to taxable years beginning after December 31, 1975. b. Disability Pensions of the Military, etc. Prior law Prior law excluded from gross income amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country, as well as similar amounts received by disabled members of the National Oceanic and Atmospheric Administration (NOAA, formerly called the Coast and Geodetic Survey), the Public Health Service, or the Foreign Service (sec. 104 (a) (4)).3 At age 65 the taxpayer then becomes eligible for the elderly credit rather than having to wait until mandatory retirement age as was the case under prior law. Public retirees who retired on disability and make this election must wait until minimum retirement age to use the retirement income credit (rather than the mandatory age of prior law). Otherwise, public retirees who retired on disability would be eligible for the retirement income credit at a substantially earlier time than under prior law. Congress did not intend this substantial liberalization of the retirement income credit for public retirees. 3 Under Treasury regulations (Reg. sec. 1.103-4(a) (3) (1) (a)), the portion of a disability pension received by a retired member of the Armed Forces which was in excess of the amount excludable under this provision was excluded as sick pay under a wage continuation plan subject to the limits of section 105 (d) if such pay was received before the member reached retirement age. This Act repeals the sick pay provision and substitutes a maximum annual exclusion of $5,200 for persons who are permanently and totally disabled. (See Explanation of provisions under a. Sick Pay above.) Reasons for change The Congress was concerned with two somewhat conflicting aspects of the exclusion of disability payments from gross income: on the one hand, the abuse of the exclusion in certain instances, particularly by retiring members of the armed forces, and on the other hand, the expectation and reliance of present members of the affected government services, especially the armed forces, on the government benefits available to them when they entered government employment or enlisted in or were drafted into the military. Criticism of the exclusion of armed forces disability pensions from income focused on a number of cases involving the disability retirement of military personnel. In many cases, armed forces personnel have been classified as disabled for military service shortly before they would have become eligible for retirement principally to obtain the benefits of the special tax exclusion on the disability portion of their retirement pay. In most of these cases the individuals, having retired from the military, earn income from other employment while receiving tax-free "disability" payments from the military. The Congress questioned the equity of allowing retired military personnel to exclude the payments which they receive as tax-exempt disability income when they are able to earn substantial amounts of income from civilian work, despite disabilities such as high blood pressure, arthritis, etc. However, in order to provide benefits to any present personnel who may have joined or continued in the government or armed services in reliance on possible tax benefits from this program, the Congress believed any changes in the tax treatment of military disability payments should affect only future members of the armed forces, NOAA, Public Health Service and Foreign Service. The Congress also believed that the risks borne by some civilian employees of the United States Government are similar to those faced in combat by the military. It thus decided to extend tax exclusion benefits to civilian government employees who receive disability pay for injuries resulting from acts of terrorism. Explanation of provisions The Act eliminates the exclusion of disability payments from income for those covered under section 104 (a) (4), that is, members of the armed forces of any country, NOAA, the Public Health Service and the Foreign Service. This change applies only prospectively to persons who join these government services after September 24, 1975. Specific exceptions continue the exclusion in certain cases for future disability payments for injuries and sickness resulting from active service in the armed forces of the United States. At all times, Veterans' Administration disability payments will continue to be excluded from gross income. In addition, even if a future serviceman who retires does not receive his disability benefits from the Veterans' Administration, he will be allowed to exclude from his gross income an amount equal to the benefits he could receive from the Veterans' Administration. Otherwise, future members of the armed forces will be allowed to exclude military disability retirement payments from their gross income only if the payments are directly related to "combat injuries." A combat-related injury is defined as an injury or sickness which is incurred as a result of any one of the following activities: (1) as a direct result of armed conflict; (2) while engaged in extra-hazardous service, even if not directly engaged in combat; (3) under conditions simulating war including maneuvers or training; or which is (4) caused by an instrumentality of war, such as weapons. This definition of combat-related injuries is meant to cover an injury or sickness attributable to the special dangers associated with armed. conflict or preparation or training for armed conflict. In addition, the Act provides an exclusion for disability payments to civilian employees of the United States Government for injuries which result from acts of terrorism and which are incurred while the employees are performing official duties outside the United States. All persons who were members of the armed forces of any country (or a military reserve unit), the National Oceanic and Atmospheric Administration, the Public Health Service and the Foreign Service as of September 24, 1975, or who as of that date were subject to a written binding commitment to enter these Government services or were retirees from these services receiving disability retirement payments which were excluded from their gross income under prior law, will continue to exclude such payments from gross income under the Act. In addition, all disability benefits paid by the Veterans' Administration will continue to be exempt from tax, as under prior law. Effective date This provision relating to members of the armed forces of any country, the National Oceanic and Atmospheric Administration, the Public Health Service and the Foreign Service applies to persons who joined these services after September 24, 1975. The exclusion for disability payments for injuries resulting from acts of terrorism applies to taxable years beginning after December 31, 1976. Revenue effect The change in the sick pay provision will increase tax receipts by $380 million in fiscal year 1977, $357 million in fiscal year 1978, and $450 million in 1981. The changes in the disability exclusion will have no revenue impact until substantial numbers of persons entering government service after September 24, 1975, retire. The new exclusion for disability payments for injuries resulting from acts of terrorism will cause a negligible revenue loss. 6. Moving Expenses (sec. 506 of the Act and secs. 217 and 82 of the Code) Prior law An employee or self-employed individual may claim a deduction from gross income for certain expenses of moving to a new residence in connection with beginning work at a new location (sec. 217). Any amount received directly or indirectly as a reimbursement of moving expenses must be included in a taxpayer's gross income as compensation for services (sec. 82), but he may offset this income by deducting expenses which would otherwise qualify as deductible items. Deductible moving expenses are the expenses of transporting the taxpayer and members of his household, as well as his household goods and personal effects, from the old to the new residence; the cost of |