(a) In general

Section 122 of the Internal Revenue Code of 1986 is amended to read as follows:

122. Certain uniformed services retirement pay and related benefits

(a) General rule

In the case of a member or former member of the armed forces of the United States, gross income does not include—

(1)

any retired or retainer pay paid under title 10 or 14, United States Code, or

(2)

any amounts not described in section 104(a)(4) received as monthly compensation, pension, pay, annuity, or allowance paid under title 10, 14, 37, or 38, United States Code, in connection with a disability or combat-related injury or disability or death of a member of the armed forces.

(b) Certain reduced uniformed services retirement pay

(1) In general

In the case of a member or former member of the uniformed services of the United States other than a member or former member of the armed forces, gross income does not include the amount of any reduction in retired or retainer pay pursuant to the provisions of chapter 73 of title 10, United States Code.

(2) Special rule

(A) Amount excluded from gross income

In the case of any individual referred to in paragraph (1), all amounts received as retired or retainer pay shall be excluded from gross income until there has been so excluded an amount equal to the consideration for the contract. The preceding sentence shall apply only to the extent that the amounts received would, but for such sentence, be includible in gross income.

(B) Consideration for the contract

For purposes of subparagraph (A) and section 72(n), the term consideration for the contract means, in respect of any individual, the sum of—

(i)

the total amount of the reductions before January 1, 1966, in the individual's retired or retainer pay by reason of an election under chapter 73 of title 10 of the United States Code, and

(ii)

any amounts deposited at any time by the individual pursuant to section 1438 or 1452(d) of such title 10.

(c) Definitions

For purposes of this section, the terms armed forces and uniformed services have the respective meanings given such terms by section 101 of title 10, United States Code.

(b) Conforming amendments

(c) Clerical amendment

The item relating to section 122 in the table of sections for part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended to read as follows:

(d) Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.