PERSONAL RESPONSIBILITY AND WORK OPPORTUNITY ACT OF 1996

REFERENCES AND BACKGROUND

Acronym: PRWOA

Bill Reference: H.R. 3734

Law Reference: P.L. 104-193

Date of Enactment : August 22, 1996

TAX-RELATED HEALTH PROVISIONS

Deny Earned Income Credit To Individuals Not Authorized To Be
Employed In The United States: Individuals are not eligible for
the credit if they do not include their taxpayer identification
number (and, if married, their spouse's taxpayer identification
number) on their tax return. Solely for these purposes and for
purposes of the present-law identification test for a qualifying
child, a taxpayer identification number is defined as a social
security number issued to an individual by the Social Security
Administration other than a number issued under section
205(c)(2)(B)(i)(II) (or that portion of sec. 205(c)(2)(B)(i)(III)
relating to it) of the Social Security Act (regarding the
issuance of a number to an individual applying for or receiving
Federally funded benefits). Effective with respect to returns the
due date for which (without regard to extensions) is more than 30
days after the date of enactment. PRWOA §451(a), and (b). IRC
§32(c)(1)(F), §32(l).

Summary Assessment Of Deficiencies For Certain Omissions On
Returns Claiming Earned Income Credit: If an individual fails to
provide a correct taxpayer identification number, such omission
will be treated as a mathematical or clerical error. If an
individual who claims the credit with respect to net earnings
from self-employment fails to pay the proper amount of self-
employment tax on such net earnings, the failure will be treated
as a mathematical or clerical error for purposes of the amount of
credit allowed. Effective with respect to returns the due date
for which (without regard to extensions) is more than 30 days
after the date of enactment. PRWOA §451(c). IRC §6213(g)(2).

Change Disqualified Income Test For Earned Income Credit: Under
prior law, for taxable years beginning after December 31, 1995,
an individual is not eligible for the earned income credit if the
aggregate amount of "disqualified income" of the taxpayer for the
taxable year exceeds $ 2,350. This threshold is not indexed.
Disqualified income is the sum of: (1) interest (taxable and tax-
exempt), (2) dividends, and (3) net rent and royalty income (if
greater than zero). Under the new law, for purposes of the
disqualified income test for the earned income credit, the
following items are added to the definition of disqualified
income: capital gain net income and net passive income (if
greater than zero) that is not self-employment income. The
threshold above which an individual is not eligible for the
credit is reduced from $2,350 to $2,200, and the threshold is
indexed for inflation after 1996. The provision generally is
effective for taxable years beginning after December 31, 1995.
For individuals who, as of June 26, 1996, had made an election to
receive the current-year credit on an advance basis, the
provision is effective for taxable years beginning after December
31, 1996. PRWOA §909(a) and (b). IRC §32(I)(1) and (2).

Modify Definition Of Adjusted Gross Income Used For Phasing Out
The Earned Income Credit: The new law modifies the definition of
AGI used for phasing out the earned income credit by disregarding
certain losses. The losses disregarded are: (1) net capital
losses (if greater than zero), (2) net losses from trusts and
estates, (3) net losses from nonbusiness rents and royalties, and
(4) 50 percent of the net losses from businesses, computed
separately with respect to sole proprietorships (other than in
farming), sole proprietorships in farming, and other businesses.
For purposes of item (4), above, amounts attributable to a
business that consists of the performance of services by the
taxpayer as an employee are not taken into account. The provision
generally is effective for taxable years beginning after December
31, 1995. For individuals who, as of June 26, 1996, had made an
election to receive the current-year credit on an advance basis,
the provision is effective for taxable years beginning after
December 31, 1996. PRWOA §910(a) and (b). IRC §32(a)(2)(B) and
§32(c)(5).