CREDIT FOR CHILD CARE EXPENSES.

SEC. 504. CREDIT FOR CHILD CARE EXPENSES. (a) Allowances of Credit for Child Care Expenses.— (1) In general.— Subpart A of part IV of subchapter A of chapter 1 (relating to credits allowable) is amended by inserting before section 45 the following new section: “SEC. 44A. EXPENSES FOR HOUSEHOLD AND DEPENDENT CARE SERVICES NECESSARY FOR GAINFUL EMPLOYMENT. “(a) Allowance of Credit.— In the case of an individual who maintains a household which includes as a member one or more qualifying individuals (as defined in subsection (c)(1)). there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to ¿0 percent of the employment-related expenses (as defined in subsection (c)(2)) paid by such individual during the taxable year. “(b) Application With Other Credits.— The credit allowed by subsection (a) shall not exceed the amount of the tax imposed by this chapter for the taxable year reduced by the stun of the credits allowable under— “(1) section 33 (relating to foreign tax credit), “(2) section 37 (relating to credit for the elderly). “(3) section 38 (relating to investment in certain depreciable property), “(4) section 40 (relating to expenses of work incentive programs), “(5) section 41 (relating to contributions to candidates for public office), “(6) section 42 (relating to general tax credit), and “(7) section 44 (relating to purchase of new principal residence). “(c) Definitions of Qualifying Individual and Employment-Related Expenses.— For purposes of this section— “(1) Qualifying individual.— The term ‘qualifying individual means— “(A) a dependent of the taxpayer who is under the ago of 15 and with respect to whom the taxpayer is entitled to a deduction under section 151(e), “(B) a dependent of the taxpayer who is physically or mentally incapable of caring for himself, or “(C) the spouse of the taxpayer, if he is physically or mentally incapable of caring for himself. “(2) Employment-related expenses.— “(A) In general.— The term ‘employment-related expenses’ means amounts paid for the following expenses, but only if such expenses are incurred to enable the taxpayer to be gainfully employed for any period for which there are 1 or more qualifying individuals with respect to the taxpayer: “(i) expenses for household services, and “(ii) expenses for the care of a qualifying individual. “(B) Exception.— Employment-related expenses described in subparagraph (A) which are incurred for services outside the taxpayer’s household shall be taken into account only if incurred for the care of a qualifying individual described in paragraph (1)(A). “(d) Dollar Limit on Amount Creditable.— The amount of the employment-related expenses incurred during any taxable year which may be taken into account under subsection (a) shall not exceed— 90 STAT. 1564 “(1) $2,000 if there is 1 qualifying individual with respect to the taxpayer for such taxable year, or “(2) $4,000 if there are 2 or more qualifying individuals with respect to the taxpayer for such taxable year. “(e) Earned Income Limitation.— “(1) In general.— Except as otherwise provided in this subsection, the amount of the employment-related expenses incurred during any taxable year which may be taken into account under subsection (a) shall not exceed— “(A) in the case of an individual who is not married at the close of such year, such individual’s earned income for such year, or “(B) in the case of an individual who is married at (be close of such year, the lesser of such individual’s earned income or the earned income of his spouse for such year, “(2) Special rule for spouse who is a student or incapable of caring for himself.— In the case of a spouse who is a student or a qualifying individual described in Subsection (c)(1)(C), for purposes of paragraph (1), such spouse shall be deemed for each month during which such spouse is a full-time student at an educational institution, or is such a qualifying individual, to be gainfully employed and to have earned income of not less than— “(A) $166 if subsection (d)(1) applies for the taxable year, or “(B) $333 if subsection (d)(2) applies for the taxable year. In the case of any husband and wife, this paragraph shall apply with respect, to only one spouse for any one month. “(f) Special Rules.— For purposes of this section— “(1) Maintaining household.— An individual shall be treated as maintaining a household for any period only if over half the cost of maintaining the household for such period is furnished by such individual (or, if such individual is married during such period, is furnished by such individual and his spouse). “(2) Married couples must file joint return.— If tile tax-payer is married at the close of the taxable year, the credit shall be allowed under subsection (a) only if the taxpayer and Ids spouse file a joint return for the taxable year. “(3) Marital status.— An individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married. “(4) Certain married individuals living apart.— If— “(A) an individual who is married and who files a separate return— “(i) maintains as his home a household which constitutes for more than one-half of the taxable year the principal place of abode of a qualifying individual, and “(ii) furnishes over half of the cost of maintaining such household during the taxable year, and “(B) during the last 6 months of such taxable year such individual’s spouse is not a member of such household, such individual shall not be considered as married. “(5) Special dependency test in case of divorced parents, etc.— If— “(A) a child (as defined in section 151(e)(3)) who is under the age of 15 or who is physically or mentally incapable 90 STAT. 1565of caring for himself receives over half of his support during the calendar year from his parents who are divorced or legally separated under a decree of divorce or separate maintenance or who are separated under a written separation agreement, and “(B) such child is hi the custody of one or both of his parents for more than one-half of the calendar year, in the case of any taxable, year beginning in such calendar year such child shall be treated as being a qualifying individual described in subparagraph (A) or (B) of subsection (c)(1). as the case may be with respect to that parent who has custody for a longer period during such calendar year than the other parent, and shall not be treated as being a qualifying individual with respect, to such other parent. “(6) Payments to related individuals.— “(A) In general.— Except as provided in subparagraph (B), no credit, shall be allowed under subsection (a) for any amount paid by the taxpayer to an individual bearing a relationship to the taxpayer described in paragraphs (1) through (8) of section 152(a) (relating to definition of dependent) or to a dependent described in paragraph (9) of such section. “(B) Exception.— Subparagraph (A) shall not apply to any amount paid by the taxpayer to an individual with respect to whom, for the taxable year of the taxpayer in which the service is performed, neither the taxpayer nor his spouse is entitled to a deduction under section 151(e) (relating to deduction for personal exemptions for dependents), but only if the service with respect to which such amount is paid constitutes employment within the meaning of section 3121(b). “(7) Student.— The term ‘student’ means an individual who during each of 5 calendar months during the taxable year is a full-time student at an educational organization. “(8) Educational organization.— The term ‘educational organization’ means an educational organization described in section 170(b)(1)(A)(ii). “(g) Regulations.— The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.” (2) Clerical amendment.— The table of sections for subpart A of part IV of subchapter A of chapter 1 is amended by inserting before the item relating to section 45 the following new item: “Sec. 44A. Expenses for household and dependent cure services necessary for gainful employment.” (b) Repeal of Deduction for Child Care Expenses.— (1) In general.— Section 214 (relating to expenses for household and dependent care services necessary for gainful employment) is hereby repealed. (2) Clerical amendment.— The table of sections for part VII of subchapter B of chapter 1 is amended by striking out the item relating to section 214. (c) Technical Amendments.— (1) Section 213(f) (relating to exclusion of amounts allowed for care of certain dependents) is amended by striking out “a deduction under section 214” and inserting in lieu thereof “a credit under section 44A”. (2) Section 9096(b)(defining income tax liability) is amended by striking out “and 44” and inserting in lieu thereof “, 44, and 44A”. 90 STAT. 1566 (3) Paragraph (4) of section 3402(m) (relating to withholding allowances based on itemized deductions) is amended by striking out “and” at the end of subparagraph (A), by striking out the period at the end of subparagraph (B) and inserting in lieu thereof “, and” , and by adding at the end thereof the following new subparagraph: “(C) may take into account tax credits to which employees are entitled.”