To amend the Internal Revenue Code of 1986 to allow a deduction for amounts paid to any qualified State tuition program and to provide that distributions from such programs which are used to pay educational expenses shall not be includible in gross income.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Securing Affordable Vocational and 
Collegiate Education (SAVE) Act.''

SEC. 2. DEDUCTION FOR PAYMENTS TO QUALIFIED STATE TUITION PROGRAMS.

    (a) In General.--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 222 as 
section 223 and by inserting after section 221 the following new 
section:

``SEC. 222. PAYMENTS TO QUALIFIED STATE TUITION PROGRAMS.

    ``(a) Allowance of Deduction.--In the case of an individual, there 
shall be allowed as a deduction an amount equal to the amount paid by 
the taxpayer during the taxable year to any qualified State tuition 
program (as defined in section 529) for the benefit of any designated 
beneficiary (as defined in such section).
    ``(b) Dollar Limitation.--The deduction allowed by subsection (a) 
for the taxable year shall not exceed $5,000 ($10,000 in the case of a 
joint return).''
    (b) Deduction Allowed in Computing Adjusted Gross Income.--Section 
62(a) of such Code is amended by inserting after paragraph (17) the 
following new paragraph:
            ``(18) Payments to qualified state tuition programs.--The 
        deduction allowed by section 222.''
    (c) Conforming Amendment.--The table of sections for part VII of 
subchapter B of chapter 1 of such Code is amended by striking the item 
relating to section 222 and inserting:

                              ``Sec. 222. Payments to qualified State 
                                        tuition programs.
                              ``Sec. 223. Cross reference.''
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

SEC. 3. EXCLUSION FROM GROSS INCOME OF EDUCATION DISTRIBUTIONS FROM 
              QUALIFIED STATE TUITION PROGRAMS.

    (a) In General.--Section 529(c)(3)(B) of the Internal Revenue Code 
of 1986 (relating to distributions) is amended to read as follows:
                    ``(B) Distributions for qualified higher education 
                expenses.--For purposes of this paragraph--
                            ``(i) In-kind distributions.--No amount 
                        shall be includible in gross income under 
                        subparagraph (A) by reason of a distribution 
                        which consists of providing a benefit to the 
                        distributee which, if paid for by the 
                        distributee, would constitute payment of a 
                        qualified higher education expense.
                            ``(ii) Cash distributions.--In the case of 
                        distributions not described in clause (i), if--
                                    ``(I) such distributions do not 
                                exceed the qualified higher education 
                                expenses (reduced by expenses described 
                                in clause (i)), no amount shall be 
                                includible in gross income, and
                                    ``(II) in any other case, the 
                                amount otherwise includible in gross 
                                income shall be reduced by an amount 
                                which bears the same ratio to such 
                                amount as such expenses bear to such 
                                distributions.
                            ``(iii) Treatment as distributions.--Any 
                        benefit furnished to a designated beneficiary 
                        under a qualified State tuition program shall 
                        be treated as a distribution to the beneficiary 
                        for purposes of this paragraph.
                            ``(iv) Coordination with hope and lifetime 
                        learning credits.--The total amount of 
                        qualified higher education expenses with 
                        respect to an individual for the taxable year 
                        shall be reduced--
                                    ``(I) as provided in section 
                                25A(g)(2), and
                                    ``(II) by the amount of such 
                                expenses which were taken into account 
                                in determining the credit allowed to 
                                the taxpayer or any other person under 
                                section 25A.
                            ``(v) Coordination with education 
                        individual retirement accounts.--If, with 
                        respect to an individual for any taxable year--
                                    ``(I) the aggregate distributions 
                                to which clauses (i) and (ii) and 
                                section 530(d)(2)(A) apply, exceed
                                    ``(II) the total amount of 
                                qualified higher education expenses 
                                otherwise taken into account under 
                                clauses (i) and (ii) (after the 
                                application of clause (iv)) for such 
                                year,
                        the taxpayer shall allocate such expenses among 
                        such distributions for purposes of determining 
                        the amount of the exclusion under clauses (i) 
                        and (ii) and section 530(d)(2)(A).''.
    (b) Conforming Amendments.--
            (1) Section 135(d)(2)(B) of such Code is amended by 
        striking ``the exclusion under section 530(d)(2)'' and 
        inserting ``the exclusions under sections 529(c)(3)(B)(i) and 
        530(d)(2)''.
            (2) Section 221(e)(2)(A) of such Code is amended by 
        inserting ``529,'' after ``135,''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

Summary: Securing Affordable Vocational and Collegiate Education (SAVE) Act - Amends the Internal Revenue Code to: (1) allow a limited deduction for amounts paid to any qualified State tuition program. And (2) provide that distributions from such programs used to pay qualified higher education expenses shall not be included in gross income.