Higher Education Savings Credit Act of 1997

Summary: Higher Education Savings Credit Act of 1997 - Amends the Internal Revenue Code to establish a credit for contributions made by a taxpayer to a qualifying higher education investment account for a dependent not over 18 years old.  Determines such credit upon a maximum annual contribution of $500 per account holder and an age-based percentage. Excludes account distributions from gross income if used to pay the holder's qualified higher education expenses, and provides for an additional tax and credit recapture (with exceptions) if used otherwise. 
Sets forth related reporting requirements.

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Higher Education 
Savings Credit Act of 1997''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. CREDIT FOR CONTRIBUTIONS TO EDUCATION INVESTMENT ACCOUNTS.

    (a) In General.--Subpart A of part IV of subchapter A of chapter 1 
(relating to nonrefundable personal credits) is amended by inserting 
after section 23 the following new section:

``SEC. 24. CONTRIBUTIONS TO EDUCATION INVESTMENT ACCOUNTS.

    ``(a) Allowance of Credit.--
            ``(1) In general.--In the case of an individual, there 
        shall be allowed as a credit against the tax imposed by this 
        chapter for the taxable year an amount equal to the applicable 
        percentage of the contributions made by the taxpayer for the 
        taxable year to an education investment account of an account 
        holder who is an individual with respect to whom the taxpayer 
        is allowed a deduction under section 151(c) for such taxable 
        year.
            ``(2) Applicable percentage.--For purposes of paragraph 
        (1), the applicable percentage is the percentage determined in 
        accordance with the following table with respect to the age of 
        the account holder as of the close of the taxable year:

                ``If the account                         The applicable
                  holder's age is:                       percentage is:

                    Not over 6.................................    50  
                    Over 6 but not over 9......................    40  
                    Over 9 but not over 12.....................    30  
                    Over 12 but not over 15....................    20  
                    Over 15 but not over 18....................    10  
    ``(b) Limitation on Amount of Contributions Taken Into Account in 
Determining Credit.--The amount of contributions which may be taken 
into account under subsection (a) with respect to each account holder 
shall not exceed $500.
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Education investment account.--The term `education 
        investment account' means a trust created or organized in the 
        United States exclusively for the purpose of paying the 
        qualified higher education expenses of the account holder, but 
        only if the written governing instrument creating the trust 
        meets the following requirements:
                    ``(A) No contribution will be accepted--
                            ``(i) unless it is in cash,
                            ``(ii) except in the case of rollover 
                        contributions from another education investment 
                        account, in excess of $1,500 for any calendar 
                        year, and
                            ``(iii) after the date on which the account 
                        holder attains age 18.
                    ``(B) The trustee is a bank (as defined in section 
                408(n)) or another person who demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                that person will administer the trust will be 
                consistent with the requirements of this section.
                    ``(C) No part of the trust assets will be invested 
                in life insurance contracts.
                    ``(D) The assets of the trust shall not be 
                commingled with other property except in a common trust 
                fund or common investment fund.
                    ``(E) Any balance in the education investment 
                account on the day after the date on which the account 
                holder attains age 30 (or, if earlier, the date on 
                which such holder dies) shall be distributed within 30 
                days of such date to the account holder (or in the case 
                of death, the beneficiary).
            ``(2) Qualified higher education expenses.--
                    ``(A) In general.--The term `qualified higher 
                education expenses' means the cost of attendance 
                (within the meaning of section 472 of the Higher 
                Education Act of 1965 (20 U.S.C. 1087ll), as in effect 
                on the date of the enactment of the Higher Education 
                Access and Affordability Act of 1997) of the account 
                holder at an eligible educational institution, except 
                that such expenses shall be reduced by--
                            ``(i) the amount excluded from gross income 
                        under section 135 by reason of such expenses, 
                        and
                            ``(ii) the amount of the reduction 
                        described in section 135(d)(1) (other than 
                        subparagraph (E)).
                    ``(B) State tuition plans.--Such term shall include 
                amounts paid or incurred to purchase tuition credits or 
                certificates, or to make contributions to an account, 
                under a qualified State tuition program (as defined in 
                section 529(b)).
            ``(3) Eligible educational institution.--The term `eligible 
        educational institution' has the meaning given such term by 
        section 135(c)(3).
            ``(4) Account holder.--The term `account holder' means the 
        individual for whose benefit the education investment account 
        is established.
            ``(5) Time when contributions deemed made.--A taxpayer 
        shall be deemed to have made a contribution on the last day of 
        the preceding taxable year if the contribution is made on 
        account of such taxable year and is made not later than the 
        time prescribed by law for filing the return for such taxable 
        year (not including extensions thereof).
            ``(6) Account may not be established for benefit of more 
        than 1 individual.--An education investment account may not be 
        established for the benefit of more than 1 individual.
            ``(7) Special rule where more than 1 account.--If, at any 
        time during a calendar year, 2 or more education investment 
        accounts are maintained for the benefit of an individual, only 
        the account first established shall be treated as an education 
        investment account for purposes of this section. This paragraph 
        shall not apply to the extent more than 1 account exists solely 
        by reason of a rollover contribution.
    ``(d) Tax Treatment of Account.--
            ``(1) In general.--An education investment account shall be 
        exempt from taxation under this subtitle. Notwithstanding the 
        preceding sentence, the education investment account shall be 
        subject to the taxes imposed by section 511 (relating to 
        imposition of tax on unrelated business income of charitable 
        organizations).
            ``(2) Special rules.--Rules similar to the rules of 
        paragraphs (2) and (4) of section 408(e) shall apply to any 
        education investment account, and any amount treated as 
        distributed under such rules shall be treated as not used to 
        pay qualified higher education expenses.
    ``(e) Tax Treatment of Distributions.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, any amount paid or distributed out of an education 
        investment account shall be included in gross income of the 
        payee or distributee for the taxable year in the manner 
        prescribed by section 72. For purposes of the preceding 
        sentence, rules similar to the rules of section 408(d)(2) shall 
        apply.
            ``(2) Distribution used to pay educational expenses.--
        Paragraph (1) shall not apply to any payment or distribution 
        out of an education investment account to the extent such 
        payment or distribution is used exclusively to pay the 
        qualified higher education expenses of the account holder.
            ``(3) Special rule for applying section 2503.--If any 
        payment or distribution from an education investment account is 
        used exclusively for the payment to an eligible educational 
        institution of the qualified higher education expenses of the 
        account holder, such payment shall be treated as a qualified 
        transfer for purposes of section 2503(e).
            ``(4) Additional tax and credit recapture for distributions 
        not used for educational expenses.--
                    ``(A) In general.--
                            ``(i) Additional tax.--The tax imposed by 
                        this chapter for any taxable year on any 
                        taxpayer who receives a payment or distribution 
                        from an education investment account which is 
                        includible in gross income under paragraph (1) 
                        shall be increased by 10 percent of the amount 
                        which is so includible.
                            ``(ii) Credit recapture.--If any payment or 
                        distribution out of an education investment 
                        account is not used exclusively to pay the 
                        qualified higher education expenses of the 
                        account holder, the account holder's tax 
                        imposed by this chapter for the taxable year in 
                        which such payment or distribution is made 
                        shall be increased by the lesser of the amount 
                        of the payment or distribution or the excess 
                        (if any) of--
                                    ``(I) the aggregate credit allowed 
                                under this section for contributions to 
                                such account, over
                                    ``(II) the aggregate increase in 
                                tax under this clause for all prior 
                                taxable years with respect to payments 
                                and distributions out of such account.
                    ``(B) Exception for disability, death, or 
                scholarship.--Subparagraph (A) shall not apply if the 
                payment or distribution is--
                            ``(i) made on account of the death or 
                        disability of the account holder, or
                            ``(ii) made on account of a scholarship (or 
                        allowance or payment described in section 
                        135(d)(1) (B) or (C)) received by the account 
                        holder to the extent the amount of the payment 
                        or distribution does not exceed the amount of 
                        the scholarship, allowance, or payment.
                    ``(C) Excess contributions returned before due date 
                of return.--Subparagraph (A) shall not apply to the 
                distribution to a contributor of any contribution paid 
                during a taxable year to an education investment 
                account to the extent that such contribution, when 
                added to previous contributions to the account during 
                the taxable year, exceeds $1,500 if--
                            ``(i) such distribution is received on or 
                        before the day prescribed by law (including 
                        extensions of time) for filing such 
                        contributor's return for such taxable year, and
                            ``(ii) such distribution is accompanied by 
                        the amount of net income attributable to such 
                        excess contribution.
                Any net income described in clause (ii) shall be 
                included in the gross income of the contributor for the 
                taxable year in which such excess contribution was 
                made.
            ``(5) Rollover contributions.--Paragraph (1) shall not 
        apply to any amount paid or distributed from an education 
        investment account to the extent that the amount received is 
        paid into another education investment account for the benefit 
        of the account holder not later than the 60th day after the day 
        on which the holder receives the payment or distribution. The 
        preceding sentence shall not apply to any payment or 
        distribution if it applied to any prior payment or distribution 
        during the 12-month period ending on the date of the payment or 
        distribution.
            ``(6) Special rules for death and divorce.--Rules similar 
        to the rules of section 220(f) (7) and (8) shall apply.
    ``(f) Community Property Laws.--This section shall be applied 
without regard to any community property laws.
    ``(g) Custodial Accounts.--For purposes of this section, a 
custodial account shall be treated as a trust if the assets of such 
account are held by a bank (as defined in section 408(n)) or another 
person who demonstrates, to the satisfaction of the Secretary, that the 
manner in which he will administer the account will be consistent with 
the requirements of this section, and if the custodial account would, 
except for the fact that it is not a trust, constitute an account 
described in subsection (b)(1). For purposes of this title, in the case 
of a custodial account treated as a trust by reason of the preceding 
sentence, the custodian of such account shall be treated as the trustee 
thereof.
    ``(h) Reports.--The trustee of an education investment account 
shall make such reports regarding such account to the Secretary and to 
the account holder with respect to contributions, distributions, and 
such other matters as the Secretary may require under regulations. The 
reports required by this subsection shall be filed at such time and in 
such manner and furnished to such individuals at such time and in such 
manner as may be required by those regulations.''
    (b) Tax on Prohibited Transactions.--Section 4975 (relating to 
prohibited transactions) is amended--
            (1) by adding at the end of subsection (c) the following 
        new paragraph:
            ``(5) Special rule for education investment accounts.--An 
        individual for whose benefit an education investment account is 
        established and any contributor to such account shall be exempt 
        from the tax imposed by this section with respect to any 
        transaction concerning such account (which would otherwise be 
        taxable under this section) if, with respect to such 
        transaction, the account ceases to be an education investment 
        account by reason of the application of section 24 to such 
        account.''; and
            (2) in subsection (e)(1), by striking ``or'' at the end of 
        subparagraph (D), by redesignating subparagraph (E) as 
        subparagraph (F), and by inserting after subparagraph (D) the 
        following new subparagraph:
                    ``(E) a education investment account described in 
                section 24(c), or''.
    (c) Failure To Provide Reports on Education Investment Accounts.--
Section 6693 (relating to failure to provide reports on individual 
retirement accounts or annuities) is amended--
            (1) by striking ``individual retirement'' and inserting 
        ``certain tax-favored'' in the heading of such section, and
            (2) in subsection (a)(2), by striking ``and'' at the end of 
        subparagraph (A), by striking the period at the end of 
        subparagraph (B) and inserting ``, and'', and by adding at the 
        end the following new subparagraph:
                    ``(C) section 24(h) (relating to education 
                investment accounts).''
    (d) Coordination With Savings Bond Exclusion.--Section 135(d)(1) is 
amended by striking ``or'' at the end of subparagraph (C), by striking 
the period at the end of subparagraph (D) and inserting ``, or'' , and 
by adding at the end the following new subparagraph:
                    ``(E) a payment or distribution from an education 
                investment account (as defined in section 24(c)).''
    (e) Clerical Amendments.--
            (1) The table of sections for subpart A of part IV of 
        subchapter A of chapter 1 is amended by inserting after the 
        item relating to section 23 the following new item:

                              ``Sec. 24. Contributions to education 
                                        investment accounts.''
            (2) The item relating to section 6693 in the table of 
        sections for subchapter B of chapter 68 is amended by striking 
        ``individual retirement'' and inserting ``certain tax-
        favored''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1997.