CHANGES IN EXCLUSIONS FOR SICK PAY AND CERTAIN MILITARY, ETC, DISABILITY PENSIONS; CERTAIN DISABILITY INCOME.

SEC. 505. CHANGES IN EXCLUSIONS FOR SICK PAY AND CERTAIN MILITARY, ETC, DISABILITY PENSIONS; CERTAIN DISABILITY INCOME. (a) Sick Pay.— Subsection (d) of section 105 (relating to amounts excluded from gross income under wage continuation plans) is amended to read as follows: “(d) Certain Disability Payments.— “(1) In general.— In the case of a taxpayer who— “(A) has not attained age 65 before the close of the taxable year, and “(B) retired on disability and, when he retired, was permanently and totally disabled, gross income does not include amounts referred to in subsection (a) if such amounts constitute wages or payments in lieu of wages for a period during which the employee is absent from work on account of permanent and total disability. “(2) Limitation.— This subsection shall not apply to the extent that the amounts referred to in paragraph (1) exceed a weekly rate of $100. “(3) Phaseout over $15,000.— If the adjusted gross income of the taxpayer for the taxable year (determined without regard to this subsection) exceeds $15,000, the amount which but for this paragraph would be excluded under this subsection for the taxable year shall be reduced by an amount equal to tire excess of the adjusted gross income (as so determined) over $15,000. “(4) Married couple must file joint return.— Except in the ease of a husband and wife who live apart, at all times during the taxable year, if the taxpayer is married at the close of the taxable year, the exclusion provided by this subsection shall be allowed only if the taxpayer and his spouse file a joint return for the taxable year. For purposes of this subsection, marital status shall be determined under section 143. “(5) Permanent and total disability defined.— For purposes of this subsection, an individual is permanently and totally disabled if he is 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. An individual shall not be considered to be permanently and totally disabled unless he furnishes proof of the existence thereof in such form and manner, and at such times, as the Secretary may require. “(6) Joint return.— For purposes of this subsection, the term ‘joint return’ means the joint return of a husband and wife made under section 6013. “(7) Coordination with section 72.— In the case of an individual described in subparagraphs (A) and (B) of paragraph (1), for purposes of section 72 the annuity starting date shall not 90 STAT. 1567be deemed to occur before the beginning of the taxable year in which the taxpayer attains age 65, or before the beginning of an earlier taxable year for which the taxpayer makes an irrevocable election not to seek the benefits of this subsection for such year and all subsequent years.” (b) Certain Military, Etc., Disability Pensions.— Section 104 (relating to compensation for injuries or sickness) is amended by redesignating subsection (b) as subsection (c) and by inserting after subsection (a) the following new subsection: “(b) Termination of Application of Subsection (a)(4) in Certain Cases.— “(1) In general.— Subsection (a)(4) shall not apply in the case of any individual who is not described in paragraph (2). “(2) Individuals to whom subsection (a)(4) continues to apply.— An individual is described in this paragraph if— “(A) on or before September 24, 1975, he was entitled to receive any amount described in subsection (a)(4), “(B) on September 24, 1975, be was a member of any organization (or reserve component thereof) referred to in subsection (a)(4) or under a binding written commitment to become such a member, “(C) he receives an amount described in subsection (a)(4) by reason of a com bat-related injury, or “(D) on application therefor, he would be entitled to receive disability compensation from the Veterans’ Administration. “(3) Special rules for combat-related injuries.— For purposes of this subsection, the term ‘combat-related injury’ means personal injury or sickness— “(A) which is incurred— “(i) as a direct result of armed conflict. “(ii) while engaged in extrahazardous service, or “(iii) under conditions stimulating war; or “(B) which is caused by an instrumentality of war. In the case of an individual who is not described in subparagraph (A) or (B) of paragraph (2), except as provided in paragraph (4), the only amounts taken into account under subsection (a)(4) shall be the amounts which he receives by reason of a combat-related injury. “(4) Amount excluded to be not less than veterans’ disability compensation.— In the case of any individual described in paragraph (2), the amounts excludable under subsection (a)(4) for any period with respect to any individual shall not be less than the maximum amount which such individual, on application therefor, would be entitled to receive as disability compensation from the Veterans’ Administration.” (c) Special Rule for Existing Permanent and Total Disability Cases.— In the case of any individual who— (1) retired before January 1, 1976, (2) either retired on disability or was entitled to retire on disability, and (3) on January 1, 1976, was permanently and totally disabled (within the meaning of section 105(d)(5) ‘of the Internal Revenue Code of 1954), 90 STAT. 1568 such individual shall be deemed to have met the requirements of section 105(d)(1)(B) of such Code (as amended by subsection (a) of this section). (d) Special Rule for Coordination With Section 72.— In the case of an individual who— (1) retired on disability before January 1, 1976, and (2) on December 31, 1975, was entitled to exclude any amount with respect to such retirement disability from gross income under section 105(d) of the Internal Revenue. Code of 1954, for purposes of section 72 the annuity starting date shall not be deemed to occur before the beginning of the taxable year in which the taxpayer attains age 65, or before the beginning of an earlier taxable year for which the taxpayer makes an irrevocable election not to seek the benefits of this subsection for such year and all subsequent years. (e) Certain Disability Income.— (1) In general.— Section 104(a) (relating to compensation for injuries or sickness) is amended— (A) by striking out “and” at the end of paragraph (3); (B) by striking out the period at the end of paragraph (4) and inserting in lieu thereof a semicolon and the word “and”; and (C) by adding at the end thereof the following new paragraph: “(5) amounts received by an individual as disability income attributable to injuries incurred as a direct result of a violent attack which the Secretary’ of State determines to be a terrorist attack and which occurred while such individual was an employee of the United States engaged in the performance of his official duties outside the United States.” (2) Effective date.— The amendments made by this subsection shall apply to taxable years beginning after December 31, 1976.