A bill to amend the Internal Revenue Code of 1986 to permanently increase the maximum annual contribution allowed to be made to Coverdell education savings accounts, and to provide for a deduction for contributions to education savings accounts.

Summary: The College Savings Act of 2004 - Amends the Internal Revenue Code to: (1) increase the maximum annual contribution limit for Coverdell education savings accounts from $2,000 to $5,000; and (2) allow a tax deduction up to $5,000 for contributions to an education savings account.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``The College Savings Act of 2004''.

SEC. 2. INCREASE IN MAXIMUM ANNUAL CONTRIBUTION FOR COVERDELL EDUCATION 
              SAVINGS ACCOUNTS.

    (a) In General.--Section 530(b)(1)(A)(iii) of the Internal Revenue 
Code of 1986 (defining Coverdell education savings account) is amended 
by striking ``$2,000'' and inserting ``$5,000''.
    (b) Conforming Amendment.--Section 4973(e)(1)(A) of the Internal 
Revenue Code of 1986 is amended by striking ``$2,000'' and inserting 
``$5,000''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.

SEC. 3. EDUCATION SAVINGS ACCOUNTS.

    (a) Deduction for Contributions.--Part VII of subchapter B of 
chapter 1 of the Internal Revenue Code of 1986 (relating to additional 
itemized deductions for individuals) is amended by redesignating 
section 224 as section 225 and inserting after section 223 the 
following new section:

``SEC. 224. EDUCATION SAVINGS.

    ``(a) Deduction Allowed.--In the case of an individual, there shall 
be allowed as a deduction an amount equal to the amount of 
contributions made by such individual to an education savings account 
during the taxable year.
    ``(b) Definitions.--
            ``(1) Education savings account.--The term `education 
        savings account' means a trust created or organized in the 
        United States exclusively for the purpose of paying the 
        qualified education expenses of an individual who is the 
        designated beneficiary of the trust (and designated as an 
        education savings account at the time created or organized), 
        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) after the date on which such 
                        beneficiary attains age 18, or
                            ``(iii) except in the case of rollover 
                        contributions, if such contribution would 
                        result in aggregate contributions for the 
                        taxable year exceeding $5,000.
                    ``(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 or who 
                has so demonstrated with respect to any individual 
                retirement plan or any Coverdell education savings 
                account.
                    ``(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) Except as provided in subsection (e)(6), any 
                balance to the credit of the designated beneficiary on 
                the date on which the beneficiary attains age 30 shall 
                be distributed within 30 days after such date to the 
                beneficiary or, if the beneficiary dies before 
                attaining age 30, shall be distributed within 30 days 
                after the date of death of such beneficiary.
                    ``(F) The age limitations in subparagraphs (A)(ii) 
                and (E), and paragraphs (4) and (5) of subsection (e), 
                shall not apply to any designated beneficiary with 
                special needs (as determined under regulations 
                prescribed by the Secretary).
            ``(2) Qualified education expenses.--The term `qualified 
        education expenses' has the meaning given such term in section 
        530(b)(2) .
            ``(3) Certain rules to apply.--Rules similar to the 
        following rules shall apply for purposes of this section:
                    ``(A) Section 219(d)(2) (relating to no deduction 
                for rollovers),
                    ``(B) Section 530(b)(5) (relating to time when 
                contributions deemed made),
                    ``(C) Section 530(f) (relating to community 
                property laws),
                    ``(D) Section 530(g) (relating to custodial 
                accounts), and
                    ``(E) Section 530(h) (relating to reports).
    ``(c) Reduction in Permitted Contribution Based on Adjusted Gross 
Income.--
            ``(1) In general.--The maximum amount which a contributor 
        could otherwise make to an account under this section shall be 
        reduced by an amount which bears the same ratio to such maximum 
        amount as--
                    ``(A) the excess of--
                            ``(i) the contributor's modified adjusted 
                        gross income for such taxable year, over
                            ``(ii) $95,000 ($190,000 in the case of a 
                        joint return), bears to
                    ``(B) $15,000 ($30,000 in the case of a joint 
                return).
            ``(2) Modified adjusted gross income.--For purposes of 
        paragraph (1), the term `modified adjusted gross income' means 
        the adjusted gross income of the taxpayer for the taxable year 
        increased by any amount excluded from gross income under 
        section 911, 931, or 933.
    ``(d) Tax Treatment of Accounts.--
            ``(1) In general.--An education savings account is exempt 
        from taxation under this subtitle unless such account has 
        ceased to be an education savings account. Notwithstanding the 
        preceding sentence, any such account is subject to the taxes 
        imposed by section 511 (relating to imposition of tax on 
        unrelated business income of charitable, etc. organizations).
            ``(2) Account terminations.--Rules similar to the rules of 
        paragraphs (2) and (4) of section 408(e) shall apply to 
        education savings accounts, and any amount treated as 
        distributed under such rules shall be treated as not used to 
        pay qualified education expenses.
    ``(e) Treatment of Distributions.--
            ``(1) In general.--Any distribution shall be includible in 
        the gross income of the distributee in the manner as provided 
        in section 72.
            ``(2) Special rules for applying estate and gift taxes with 
        respect to account.--Rules similar to the rules of paragraphs 
        (2), (4), and (5) of section 529(c) shall apply for purposes of 
        this section.
            ``(3) Additional tax for distributions not used for 
        educational expenses.--
                    ``(A) In general.--The tax imposed by this chapter 
                for any taxable year on any taxpayer who receives a 
                payment or distribution from an education individual 
                retirement account which is in excess of the qualified 
                education expenses of the designated beneficiary during 
                the taxable year shall be increased by 10 percent of 
                the amount of such excess.
                    ``(B) Exceptions.--Subparagraph (A) shall not apply 
                if the payment or distribution is--
                            ``(i) made to a beneficiary (or to the 
                        estate of the designated beneficiary) on or 
                        after the death of the designated beneficiary,
                            ``(ii) attributable to the designated 
                        beneficiary's being disabled (within the 
                        meaning of section 72(m)(7)),
                            ``(iii) made on account of a scholarship, 
                        allowance, or payment described in section 
                        25A(g)(2) 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, or
                            ``(iv) made on account of the attendance of 
                        the designated beneficiary at the United States 
                        Military Academy, the United States Naval 
                        Academy, the United States Air Force Academy, 
                        the United States Coast Guard Academy, or the 
                        United States Merchant Marine Academy, to the 
                        extent that the amount of the payment or 
                        distribution does not exceed the costs of 
                        advanced education (as defined by section 
                        2005(e)(3) of title 10, United States Code, as 
                        in effect on the date of the enactment of this 
                        section) attributable to such attendance.
                    ``(C) Contributions returned before certain date.--
                Subparagraph (A) shall not apply to the distribution of 
                any contribution made during a taxable year on behalf 
                of the designated beneficiary if--
                            ``(i) such distribution is made before the 
                        first day of the sixth month of the taxable 
                        year following the 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 gross income for the taxable year in which 
                such excess contribution was made.
            ``(4) Rollover contributions.--Paragraph (1) shall not 
        apply to any amount paid or distributed from an education 
        savings account to the extent that the amount received is paid, 
        not later than the 60th day after the date of such payment or 
        distribution, into another education savings account for the 
        benefit of the same beneficiary or a member of the family 
        (within the meaning of section 529(e)(2)) of such beneficiary 
        who has not attained age 30 as of such date. 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.
            ``(5) Change in beneficiary.--Any change in the beneficiary 
        of an education savings account shall not be treated as a 
        distribution for purposes of paragraph (1) if the new 
        beneficiary is a member of the family (as so defined) of the 
        old beneficiary and has not attained age 30 as of the date of 
        such change.
            ``(6) Special rules for death and divorce.--Rules similar 
        to the rules of paragraphs (7) and (8) of section 220(f) shall 
        apply. In applying the preceding sentence, members of the 
        family (as so defined) of the designated beneficiary shall be 
        treated in the same manner as the spouse under such paragraph 
        (8).
            ``(7) Deemed distribution on required distribution date.--
        In any case in which a distribution is required under 
        subsection (b)(1)(E), any balance to the credit of a designated 
        beneficiary as of the close of the 30-day period referred to in 
        such subsection for making such distribution shall be deemed 
        distributed at the close of such period.''.
    (b) Tax on Excess Contributions.--
            (1) In general.--Subsection (a) of section 4973 of the 
        Internal Revenue Code of 1986 (relating to tax on excess 
        contributions to certain tax-favored accounts and annuities) is 
        amended by striking ``or'' at the end of paragraph (4), by 
        inserting ``or'' at the end of paragraph (5), and by inserting 
        after paragraph (5) the following new paragraph:
            ``(6) an education savings account (as defined in section 
        224),''.
            (2) Excess contribution.--Section 4973 of such Code is 
        amended by adding at the end the following new subsection:
    ``(h) Excess Contributions to Education Savings Accounts.--For 
purposes of this section--
            ``(1) In general.--In the case of education savings 
        accounts maintained for the benefit of any one beneficiary, the 
        term `excess contributions' means the sum of--
                    ``(A) the amount by which the amount contributed 
                for the taxable year to such accounts exceeds $5,000 
                (or, if less, the sum of the maximum amounts permitted 
                to be contributed under section 224(c) by the 
                contributors to such accounts for such year); and
                    ``(B) the amount determined under this subsection 
                for the preceding taxable year, reduced by the sum of--
                            ``(i) the distributions out of the accounts 
                        for the taxable year (other than rollover 
                        distributions); and
                            ``(ii) the excess (if any) of the maximum 
                        amount which may be contributed to the accounts 
                        for the taxable year over the amount 
                        contributed to the accounts for the taxable 
                        year.
            ``(2) Special rules.--For purposes of paragraph (1), the 
        following contributions shall not be taken into account:
                    ``(A) Any contribution which is distributed out of 
                the education savings account in a distribution to 
                which section 224(e)(3)(C) applies.
                    ``(B) Any rollover contribution.''.
    (c) Failure to Provide Reports on Education Savings Accounts.--
Paragraph (2) of section 6693(a) of the Internal Revenue Code of 1986 
(relating to failure to provide reports on individual retirement 
accounts or annuities) is amended by striking ``and'' at the end of 
subparagraph (D), by striking the period at the end of subparagraph (E) 
and inserting ``, and'', and by adding at the end the following new 
subparagraph:
                    ``(F) section 224(b)(3)(E) (relating to education 
                savings accounts).''.
    (d) Clerical Amendment.--The table of section for part VII of 
subchapter B of chapter 1 of the Internal Revenue Code of 1986 is 
amended by striking the item relating to section 224 and inserting the 
following new items:

        ``Sec. 224. Education savings.
        ``Sec. 225. Cross reference.''.
    (e) Effective Date.--The amendments made by this section shall 
apply to contributions made in taxable years beginning after December 
31, 2004.