A bill to amend the Internal Revenue Code of 1954 to modify the credit allowed for expenses for household and dependent care services necessary for gainful employment to include credit to individuals for expenses for the care of a mentally or physically handicapped child of such individual and to provide for the exemption from taxation of trusts established to provide care for such children except to the extent of distributions and to provide a deduction for contributions to such trusts.

Amends the Internal Revenue Code to provide that taxpayers who incur expenses for the care of a dependent child who is mentally or physically handicapped shall be eligible for the child care expenses credit whether or not the taxpayer incurred such expenses to enable the taxpayer to seek gainful employment or such expenses were incurred outside his household. Increases the amount of expenses which may be considered in determining the amount of the credit. Provides that the earned income limitation shall not apply to taxpayers who provide care for handicapped children.

Grants tax-exempt status to a trust established for the care of a physically or mentally handicapped child of the taxpayer. Allows an income tax deduction for contributions to a child care trust. Limits the amount of such deduction to the lesser of 15 percent of the taxpayer's compensation includable in gross income for the taxable year, or $1,500. Provides that distributions from such a trust shall not be taken into consideration in determining the eligibility of such child for Federal or State assistance.