II

104TH CONGRESS

1ST SESSION S. 452

To amend the Internal Revenue Code of 1986 to provide tax relief for

the middle class.

IN THE SENATE OF THE UNITED STATES

FEBRUARY 16 (legislative day, JANUARY 30), 1995

Mr. MOYNIHAN (for himself and Mr. DASCHLE) introduced the following bill;

which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

tax relief for the middle class.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Middle-Class Bill of Rights Tax Relief Act of 1995’’.

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment

9 to, or repeal of, a section or other provision, the reference
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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986.

3 (c) TABLE OF CONTENTS.—

Sec. 1. Short title; amendment of 1986 Code.

TITLE I—MIDDLE CLASS TAX RELIEF

Sec. 101. Credit for families with young children.

Sec. 102. Deduction for higher education expenses.

TITLE II—PROVISIONS RELATING TO INDIVIDUAL RETIREMENT

PLANS

Subtitle A—Retirement Savings Incentives

PART I—IRA DEDUCTION

Sec. 201. Increase in income limitations.

Sec. 202. Inflation adjustment for deductible amount and income limitations.

Sec. 203. Coordination of IRA deduction limit with elective deferral limit.

PART II—NONDEDUCTIBLE TAX-FREE IRA’S

Sec. 211. Establishment of nondeductible tax-free individual retirement accounts.

Subtitle B—Penalty-Free Distributions

Sec. 221. Distributions from certain plans may be used without penalty to purchase first homes, to pay higher education or financially devastating medical expenses, or by the unemployed.

Sec. 222. Contributions must be held at least 5 years in certain cases.

4 TITLE I—MIDDLE CLASS TAX

5 RELIEF

6 SEC. 101. CREDIT FOR FAMILIES WITH YOUNG CHILDREN.

7 (a) IN GENERAL.—Subpart A of part IV of sub8 chapter A of chapter 1 (relating to nonrefundable personal

9 credits) is amended by inserting after section 22 the fol10 lowing new section:

11 ‘‘SEC. 23. FAMILIES WITH YOUNG CHILDREN.

12 ‘‘(a) ALLOWANCE OF CREDIT.—
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1 ‘‘(1) IN GENERAL.—In the case of an individ2 ual, there shall be allowed as a credit against the tax

3 imposed by this chapter for the taxable year an

4 amount equal to $300 multiplied by the number of

5 eligible children of the taxpayer for the taxable year.

6 ‘‘(2) INCREASE IN CREDIT.—In the case of tax7 able years beginning after December 31, 1998, para8 graph (1) shall be applied by substituting ‘$500’ for

9 ‘$300’.

10 ‘‘(b) LIMITATIONS.—

11 ‘‘(1) PHASE-OUT OF CREDIT.—

12 ‘‘(A) IN GENERAL.—The amount of the

13 credit allowed under subsection (a) shall be re14 duced (but not below zero) by the amount de15 termined under subparagraph (B).

16 ‘‘(B) AMOUNT OF REDUCTION.—The

17 amount determined under this subparagraph

18 equals the amount which bears the same ratio

19 to the credit (determined without regard to this

20 subsection) as—

21 ‘‘(i) the excess of—

22 ‘‘(I) the taxpayer’s adjusted

23 gross income for such taxable year,

24 over

25 ‘‘(II) $60,000, bears to
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1 ‘‘(ii) $15,000.

2 Any amount determined under this subpara3 graph which is not a multiple of $10 shall be

4 rounded to the next lowest $10.

5 ‘‘(C) ADJUSTED GROSS INCOME.—For pur6 poses of this paragraph, adjusted gross income

7 of any taxpayer shall be increased by any

8 amount excluded from gross income under sec9 tion 911, 931, or 933.

10 ‘‘(2) LIMITATION BASED ON AMOUNT OF

11 TAX.—The credit allowed by subsection (a) for the

12 taxable year (after the application of paragraph (1))

13 shall not exceed the excess (if any) of—

14 ‘‘(A) the taxpayer’s regular tax liability for

15 the taxable year reduced by the credits allow16 able against such tax under this subpart (other

17 than this section) determined without regard to

18 section 26, over

19 ‘‘(B) the sum of—

20 ‘‘(i) the taxpayer’s tentative minimum

21 tax for such taxable year, plus

22 ‘‘(ii) the credit allowed for the taxable

23 year under section 32.
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1 ‘‘(c) ELIGIBLE CHILD.—For purposes of this section,

2 the term ‘eligible child’ means any child (as defined in sec3 tion 151(c)(3)) of the taxpayer—

4 ‘‘(1) who has not attained age 13 as of the

5 close of the calendar year in which the taxable year

6 of the taxpayer begins,

7 ‘‘(2) who is a dependent of the taxpayer with

8 respect to whom the taxpayer is allowed a deduction

9 under section 151 for such taxable year, and

10 ‘‘(3) whose TIN is included on the taxpayer’s

11 return for such taxable year.

12 ‘‘(d) INFLATION ADJUSTMENTS.—In the case of a

13 taxable year beginning in a calendar year after 1999—

14 ‘‘(1) IN GENERAL.—The $500 and $60,000

15 amounts contained in subsections (a)(2) and (b)(2)

16 shall each be increased by an amount equal to—

17 ‘‘(A) such dollar amount, multiplied by

18 ‘‘(B) the cost-of-living adjustment deter19 mined under section 1(f)(3) for the calendar

20 year in which the taxable year begins, deter21 mined by substituting ‘calendar year 1998’ for

22 ‘calendar year 1992’ in subparagraph (B)

23 thereof.

24 ‘‘(2) INCREASE IN PHASEOUT RANGE.—If the

25 amount applicable under subsection (a) for any tax-
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1 able year exceeds $500, subsection (b)(2)(B) shall be

2 applied by substituting an amount equal to 30 times

3 such applicable amount for ‘$15,000’.

4 ‘‘(3) ROUNDING.—If any amount as adjusted

5 under paragraph (1) is not a multiple of $100, such

6 amount shall be rounded to the next lowest multiple

7 of $100.

8 ‘‘(e) SPECIAL RULES.—

9 ‘‘(1) AMOUNT OF CREDIT MAY BE DETERMINED

10 UNDER TABLES.—The amount of the credit allowed

11 by this section may be determined under tables pre12 scribed by the Secretary.

13 ‘‘(2) CERTAIN OTHER RULES APPLY.—Rules

14 similar to the rules of subsections (c)(1) (E) and

15 (F), (d), and (e) of section 32 shall apply for pur16 poses of this section.’’

17 (b) CLERICAL AMENDMENT.—The table of sections

18 for subpart A of part IV of subchapter A of chapter 1

19 is amended by inserting after the item relating to section

20 22 the following new item:

‘‘Sec. 23. Families with young children.’’

21 (c) EFFECTIVE DATE.—The amendments made by

22 this section shall apply to taxable years beginning after

23 December 31, 1995.
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1 SEC. 102. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

2 (a) DEDUCTION ALLOWED.— Part VII of subchapter

3 B of chapter 1 (relating to additional itemized deductions

4 for individuals) is amended by redesignating section 220

5 as section 221 and by inserting after section 219 the fol6 lowing new section:

7 ‘‘SEC. 220. HIGHER EDUCATION TUITION AND FEES.

8 ‘‘(a) ALLOWANCE OF DEDUCTION.—In the case of an

9 individual, there shall be allowed as a deduction the

10 amount of qualified higher education expenses paid by the

11 taxpayer during the taxable year.

12 ‘‘(b) LIMITATIONS.—

13 ‘‘(1) DOLLAR LIMITATION.—

14 ‘‘(A) IN GENERAL.—The amount allowed

15 as a deduction under subparagraph (a) for any

16 taxable year shall not exceed $10,000.

17 ‘‘(B) PHASE-IN.—In the case of taxable

18 years beginning in 1996, 1997, or 1998,

19 ‘$5,000’ shall be substituted for ‘$10,000’ in

20 subparagraph (A).

21 ‘‘(2) LIMITATION BASED ON MODIFIED AD22 JUSTED GROSS INCOME.—

23 ‘‘(A) IN GENERAL.—The amount which

24 would (but for this paragraph) be taken into ac25 count under paragraph (1) shall be reduced
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1 (but not below zero) by the amount determined

2 under subparagraph (B).

3 ‘‘(B) AMOUNT OF REDUCTION.—The

4 amount determined under this subparagraph

5 equals the amount which bears the same ratio

6 to the amount which would be so taken into ac7 count as—

8 ‘‘(i) the excess of—

9 ‘‘(I) the taxpayer’s modified ad10 justed gross income for such taxable

11 year, over

12 ‘‘(II) $70,000 ($100,000 in the

13 case of a joint return), bears to

14 ‘‘(ii) $20,000.

15 ‘‘(C) MODIFIED ADJUSTED GROSS IN16 COME.—The term ‘modified adjusted gross in17 come’ means the adjusted gross income of the

18 taxpayer for the taxable year determined—

19 ‘‘(i) without regard to this section and

20 sections 911, 931, and 933, and

21 ‘‘(ii) after the application of sections

22 86, 135, 219, and 469.

23 For purposes of sections 86, 135, 219, and

24 469, adjusted gross income shall be determined
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1 without regard to the deduction allowed under

2 this section.

3 ‘‘(D) INFLATION ADJUSTMENTS.—

4 ‘‘(i) IN GENERAL.—In the case of a

5 taxable year beginning after 1999, the

6 $70,000 and $100,000 amounts described

7 in subparagraph (B) shall each be in8 creased by an amount equal to—

9 ‘‘(I) such dollar amounts, multi10 plied by

11 ‘‘(II) the cost-of-living adjust12 ment determined under section 1(f)(3)

13 for the calendar year in which the tax14 able year begins, determined by sub15 stituting ‘calendar year 1998’ for ‘cal16 endar year 1992’ in subparagraph (B)

17 thereof.

18 ‘‘(ii) ROUNDING.—If any amount as

19 adjusted under clause (i) is not a multiple

20 of $5,000, such amount shall be rounded

21 to the next lowest multiple of $5,000.

22 ‘‘(c) QUALIFIED HIGHER EDUCATION EXPENSES.—

23 For purposes of this section—

24 ‘‘(1) QUALIFIED HIGHER EDUCATION EX25 PENSES.—
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1 ‘‘(A) IN GENERAL.—The term ‘qualified

2 higher education expenses’ means tuition and

3 fees charged by an educational institution and

4 required for the enrollment or attendance of—

5 ‘‘(i) the taxpayer,

6 ‘‘(ii) the taxpayer’s spouse, or

7 ‘‘(iii) any dependent of the taxpayer

8 with respect to whom the taxpayer is al9 lowed a deduction under section 151,

10 as an eligible student at an institution of higher

11 education.

12 ‘‘(B) EXCEPTION FOR EDUCATION INVOLV13 ING SPORTS, ETC.—Such term does not include

14 expenses with respect to any course or other

15 education involving sports, games, or hobbies,

16 unless such expenses—

17 ‘‘(i) are part of a degree program, or

18 ‘‘(ii) are deductible under this chapter

19 without regard to this section.

20 ‘‘(C) EXCEPTION FOR NONACADEMIC

21 FEES.—Such term does not include any student

22 activity fees, athletic fees, insurance expenses,

23 or other expenses unrelated to a student’s aca24 demic course of instruction.
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1 ‘‘(D) ELIGIBLE STUDENT.—For purposes

2 of subparagraph (A), the term ‘eligible student’

3 means a student who—

4 ‘‘(i) meets the requirements of section

5 484(a)(1) of the Higher Education Act of

6 1965 (20 U.S.C. 1091(a)(1)), as in effect

7 on the date of the enactment of this sec8 tion, and

9 ‘‘(ii)(I) is carrying at least one-half

10 the normal full-time work load for the

11 course of study the student is pursuing, as

12 determined by the institution of higher

13 education, or

14 ‘‘(II) is enrolled in a course which en15 ables the student to improve the student’s

16 job skills or to acquire new job skills.

17 ‘‘(E) IDENTIFICATION REQUIREMENT.—No

18 deduction shall be allowed under subsection (a)

19 to a taxpayer with respect to an eligible student

20 unless the taxpayer includes the name, age, and

21 taxpayer identification number of such eligible

22 student on the return of tax for the taxable

23 year.
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1 ‘‘(2) INSTITUTION OF HIGHER EDUCATION.—

2 The term ‘institution of higher education’ means an

3 institution which—

4 ‘‘(A) is described in section 481 of the

5 Higher Education Act of 1965 (20 U.S.C.

6 1088), as in effect on the date of the enactment

7 of this section, and

8 ‘‘(B) is eligible to participate in programs

9 under title IV of such Act.

10 ‘‘(d) SPECIAL RULES.—

11 ‘‘(1) NO DOUBLE BENEFIT.—

12 ‘‘(A) IN GENERAL.—No deduction shall be

13 allowed under subsection (a) for qualified high14 er education expenses with respect to which a

15 deduction is allowable to the taxpayer under

16 any other provision of this chapter unless the

17 taxpayer irrevocably waives his right to the de18 duction of such expenses under such other pro19 vision.

20 ‘‘(B) DEPENDENTS.—No deduction shall

21 be allowed under subsection (a) to any individ22 ual with respect to whom a deduction under

23 section 151 is allowable to another taxpayer for

24 a taxable year beginning in the calendar year in

25 which such individual’s taxable year begins.
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1 ‘‘(C) SAVINGS BOND EXCLUSION.—A de2 duction shall be allowed under subsection (a)

3 for qualified higher education expenses only to

4 the extent the amount of such expenses exceeds

5 the amount excludable under section 135 for

6 the taxable year.

7 ‘‘(2) LIMITATION ON TAXABLE YEAR OF DE8 DUCTION.—

9 ‘‘(A) IN GENERAL.—A deduction shall be

10 allowed under subsection (a) for any taxable

11 year only to the extent the qualified higher edu12 cation expenses are in connection with enroll13 ment at an institution of higher education dur14 ing the taxable year.

15 ‘‘(B) CERTAIN PREPAYMENTS ALLOWED.—

16 Subparagraph (A) shall not apply to qualified

17 higher education expenses paid during a taxable

18 year if such expenses are in connection with an

19 academic term beginning during such taxable

20 year or during the 1st 3 months of the next

21 taxable year.

22 ‘‘(3) ADJUSTMENT FOR CERTAIN SCHOLAR23 SHIPS AND VETERANS BENEFITS.—The amount of

24 qualified higher education expenses otherwise taken

25 into account under subsection (a) with respect to the
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1 education of an individual shall be reduced (before

2 the application of subsection (b)) by the sum of the

3 amounts received with respect to such individual for

4 the taxable year as—

5 ‘‘(A) a qualified scholarship which under

6 section 117 is not includable in gross income,

7 ‘‘(B) an educational assistance allowance

8 under chapter 30, 31, 32, 34, or 35 of title 38,

9 United States Code, or

10 ‘‘(C) a payment (other than a gift, be11 quest, devise, or inheritance within the meaning

12 of section 102(a)) for educational expenses, or

13 attributable to enrollment at an eligible edu14 cational institution, which is exempt from in15 come taxation by any law of the United States.

16 ‘‘(4) NO DEDUCTION FOR MARRIED INDIVID17 UALS FILING SEPARATE RETURNS.—If the taxpayer

18 is a married individual (within the meaning of sec19 tion 7703), this section shall apply only if the tax20 payer and the taxpayer’s spouse file a joint return

21 for the taxable year.

22 ‘‘(5) NONRESIDENT ALIENS.—If the taxpayer is

23 a nonresident alien individual for any portion of the

24 taxable year, this section shall apply only if such in25 dividual is treated as a resident alien of the United
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1 States for purposes of this chapter by reason of an

2 election under subsection (g) or (h) of section 6013.

3 ‘‘(6) REGULATIONS.—The Secretary may pre4 scribe such regulations as may be necessary or ap5 propriate to carry out this section, including regula6 tions requiring recordkeeping and information re7 porting.’’

8 (b) DEDUCTION ALLOWED IN COMPUTING AD9 JUSTED GROSS INCOME.—Section 62(a) is amended by in10 serting after paragraph (15) the following new paragraph:

11 ‘‘(16) HIGHER EDUCATION TUITION AND

12 FEES.—The deduction allowed by section 220.’’

13 (c) CONFORMING AMENDMENT.—The table of sec14 tions for part VII of subchapter B of chapter 1 is amended

15 by striking the item relating to section 220 and inserting:

‘‘Sec. 220. Higher education tuition and fees.

‘‘Sec. 221. Cross reference.’’

16 (d) EFFECTIVE DATE.—The amendments made by

17 this section shall apply to payments made after December

18 31, 1995.
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1 TITLE II—PROVISIONS RELAT2 ING TO INDIVIDUAL RETIRE3 MENT PLANS

4 Subtitle A—Retirement Savings

5 Incentives

6 PART I—IRA DEDUCTION

7 SEC. 201. INCREASE IN INCOME LIMITATIONS.

8 (a) IN GENERAL.—Subparagraph (B) of section

9 219(g)(3) is amended—

10 (1) by striking ‘‘$40,000’’ in clause (i) and in11 serting ‘‘$80,000’’, and

12 (2) by striking ‘‘$25,000’’ in clause (ii) and in13 serting ‘‘$50,000’’.

14 (b) PHASE-OUT OF LIMITATIONS.—Clause (ii) of sec15 tion 219(g)(2)(A) is amended by striking ‘‘$10,000’’ and

16 inserting ‘‘an amount equal to 10 times the dollar amount

17 applicable for the taxable year under subsection

18 (b)(1)(A)’’.

19 (c) EFFECTIVE DATE.—The amendments made by

20 this section shall apply to taxable years beginning after

21 December 31, 1995.
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1 SEC. 202. INFLATION ADJUSTMENT FOR DEDUCTIBLE

2 AMOUNT AND INCOME LIMITATIONS.

3 (a) IN GENERAL.—Section 219 is amended by redes4 ignating subsection (h) as subsection (i) and by inserting

5 after subsection (g) the following new subsection:

6 ‘‘(h) COST-OF-LIVING ADJUSTMENTS.—

7 ‘‘(1) IN GENERAL.—In the case of any taxable

8 year beginning in a calendar year after 1996, each

9 dollar amount to which this subsection applies shall

10 be increased by an amount equal to—

11 ‘‘(A) such dollar amount, multiplied by

12 ‘‘(B) the cost-of-living adjustment deter13 mined under section 1(f)(3) for the calendar

14 year in which the taxable year begins, deter15 mined by substituting ‘calendar year 1995’ for

16 ‘calendar year 1992’ in subparagraph (B)

17 thereof.

18 ‘‘(2) DOLLAR AMOUNTS TO WHICH SUBSECTION

19 APPLIES.—This subsection shall apply to—

20 ‘‘(A) the $2,000 amounts under subsection

21 (b)(1)(A) and (c), and

22 ‘‘(B) the applicable dollar amounts under

23 subsection (g)(3)(B).

24 ‘‘(3) ROUNDING RULES.—

25 ‘‘(A) DEDUCTION AMOUNTS.—If any

26 amount referred to in paragraph (2)(A) as ad-
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1 justed under paragraph (1) is not a multiple of

2 $500, such amount shall be rounded to the next

3 lowest multiple of $500.

4 ‘‘(B) APPLICABLE DOLLAR AMOUNTS.—If

5 any amount referred to in paragraph (2)(B) as

6 adjusted under paragraph (1) is not a multiple

7 of $5,000, such amount shall be rounded to the

8 next lowest multiple of $5,000.’’

9 (b) CONFORMING AMENDMENTS.—

10 (1) Clause (i) of section 219(c)(2)(A) is amend11 ed to read as follows:

12 ‘‘(i) the sum of $250 and the dollar

13 amount in effect for the taxable year under

14 subsection (b)(1)(A), or’’.

15 (2) Section 408(a)(1) is amended by striking

16 ‘‘in excess of $2,000 on behalf of any individual’’

17 and inserting ‘‘on behalf of any individual in excess

18 of the amount in effect for such taxable year under

19 section 219(b)(1)(A)’’.

20 (3) Section 408(b)(2)(B) is amended by strik21 ing ‘‘$2,000’’ and inserting ‘‘the dollar amount in

22 effect under section 219(b)(1)(A)’’.

23 (4) Subparagraph (A) of section 408(d)(5) is

24 amended by striking ‘‘$2,250’’ and inserting ‘‘the
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1 dollar amount in effect for the taxable year under

2 section 219(c)(2)(A)(i)’’.

3 (5) Section 408(j) is amended by striking

4 ‘‘$2,000’’.

5 (c) EFFECTIVE DATE.—The amendments made by

6 this section shall apply to taxable years beginning after

7 December 31, 1995.

8 SEC. 203. COORDINATION OF IRA DEDUCTION LIMIT WITH

9 ELECTIVE DEFERRAL LIMIT.

10 (a) IN GENERAL.—Section 219(b) (relating to maxi11 mum amount of deduction) is amended by adding at the

12 end the following new paragraph:

13 ‘‘(4) COORDINATION WITH ELECTIVE DEFER14 RAL LIMIT.—The amount determined under para15 graph (1) or subsection (c)(2) with respect to any

16 individual for any taxable year shall not exceed the

17 excess (if any) of—

18 ‘‘(A) the limitation applicable for the tax19 able year under section 402(g)(1), over

20 ‘‘(B) the elective deferrals (as defined in

21 section 402(g)(3)) of such individual for such

22 taxable year.’’

23 (b) CONFORMING AMENDMENT.—Section 219(c) is

24 amended by adding at the end the following new para25 graph:
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1 ‘‘(3) CROSS REFERENCE.—

‘‘For reduction in paragraph (2) amount, see subsection (b)(4).’’

2 (c) EFFECTIVE DATE.—The amendments made by

3 this section shall apply to taxable years beginning after

4 December 31, 1995.

5 PART II—NONDEDUCTIBLE TAX-FREE

6 IRA’S

7 SEC. 211. ESTABLISHMENT OF NONDEDUCTIBLE TAX-FREE

8 INDIVIDUAL RETIREMENT ACCOUNTS.

9 (a) IN GENERAL.—Subpart A of part I of subchapter

10 D of chapter 1 (relating to pension, profit-sharing, stock

11 bonus plans, etc.) is amended by inserting after section

12 408 the following new section:

13 ‘‘SEC. 408A. SPECIAL INDIVIDUAL RETIREMENT ACCOUNTS.

14 ‘‘(a) GENERAL RULE.—Except as provided in this

15 chapter, a special individual retirement account shall be

16 treated for purposes of this title in the same manner as

17 an individual retirement plan.

18 ‘‘(b) SPECIAL INDIVIDUAL RETIREMENT AC19 COUNT.—For purposes of this title, the term ‘special indi20 vidual retirement account’ means an individual retirement

21 plan which is designated at the time of establishment of

22 the plan as a special individual retirement account.

23 ‘‘(c) TREATMENT OF CONTRIBUTIONS.—
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1 ‘‘(1) NO DEDUCTION ALLOWED.—No deduction

2 shall be allowed under section 219 for a contribution

3 to a special individual retirement account.

4 ‘‘(2) CONTRIBUTION LIMIT.—The aggregate

5 amount of contributions for any taxable year to all

6 special individual retirement accounts maintained for

7 the benefit of an individual shall not exceed the ex8 cess (if any) of—

9 ‘‘(A) the maximum amount allowable as a

10 deduction under section 219 with respect to

11 such individual for such taxable year, over

12 ‘‘(B) the amount so allowed.

13 ‘‘(3) SPECIAL RULES FOR QUALIFIED TRANS14 FERS.—

15 ‘‘(A) IN GENERAL.—No rollover contribu16 tion may be made to a special individual retire17 ment account unless it is a qualified transfer.

18 ‘‘(B) LIMIT NOT TO APPLY.—The limita19 tion under paragraph (2) shall not apply to a

20 qualified transfer to a special individual retire21 ment account.

22 ‘‘(d) TAX TREATMENT OF DISTRIBUTIONS.—

23 ‘‘(1) IN GENERAL.—Except as provided in this

24 subsection, any amount paid or distributed out of a
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1 special individual retirement account shall not be in2 cluded in the gross income of the distributee.

3 ‘‘(2) EXCEPTION FOR EARNINGS ON CONTRIBU4 TIONS HELD LESS THAN 5 YEARS.—

5 ‘‘(A) IN GENERAL.—Any amount distrib6 uted out of a special individual retirement ac7 count which consists of earnings allocable to

8 contributions made to the account during the 5-

9 year period ending on the day before such dis10 tribution shall be included in the gross income

11 of the distributee for the taxable year in which

12 the distribution occurs.

13 ‘‘(B) ORDERING RULE.—

14 ‘‘(i) FIRST-IN, FIRST-OUT RULE.—

15 Distributions from a special individual re16 tirement account shall be treated as having

17 been made—

18 ‘‘(I) first from the earliest con19 tribution (and earnings allocable

20 thereto) remaining in the account at

21 the time of the distribution, and

22 ‘‘(II) then from other contribu23 tions (and earnings allocable thereto)

24 in the order in which made.
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1 ‘‘(ii) ALLOCATIONS BETWEEN CON2 TRIBUTIONS AND EARNINGS.—Any portion

3 of a distribution allocated to a contribution

4 (and earnings allocable thereto) shall be

5 treated as allocated first to the earnings

6 and then to the contribution.

7 ‘‘(iii) ALLOCATION OF EARNINGS.—

8 Earnings shall be allocated to a contribu9 tion in such manner as the Secretary may

10 by regulations prescribe.

11 ‘‘(iv) CONTRIBUTIONS IN SAME

12 YEAR.—Except as provided in regulations,

13 all contributions made during the same

14 taxable year may be treated as 1 contribu15 tion for purposes of this subparagraph.

16 ‘‘(C) CROSS REFERENCE.—

‘‘For additional tax for early withdrawal, see section 72(t).

17 ‘‘(3) QUALIFIED TRANSFER.—

18 ‘‘(A) IN GENERAL.—Paragraph (2) shall

19 not apply to any distribution which is trans20 ferred in a qualified transfer to another special

21 individual retirement account.

22 ‘‘(B) CONTRIBUTION PERIOD.—For pur23 poses of paragraph (2), the special individual

24 retirement account to which any contributions
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1 are transferred shall be treated as having held

2 such contributions during any period such con3 tributions were held (or are treated as held

4 under this subparagraph) by the special individ5 ual retirement account from which transferred.

6 ‘‘(4) SPECIAL RULES RELATING TO CERTAIN

7 TRANSFERS.—

8 ‘‘(A) IN GENERAL.—Notwithstanding any

9 other provision of law, in the case of a qualified

10 transfer to a special individual retirement ac11 count from an individual retirement plan which

12 is not a special individual retirement account—

13 ‘‘(i) there shall be included in gross

14 income any amount which, but for the

15 qualified transfer, would be includible in

16 gross income, but

17 ‘‘(ii) section 72(t) shall not apply to

18 such amount.

19 ‘‘(B) TIME FOR INCLUSION.—In the case

20 of any qualified transfer which occurs before

21 January 1, 1997, any amount includible in

22 gross income under subparagraph (A) with re23 spect to such contribution shall be includible

24 ratably over the 4-taxable year period beginning

25 in the taxable year in which the amount was
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1 paid or distributed out of the individual retire2 ment plan.

3 ‘‘(e) QUALIFIED TRANSFER.—For purposes of this

4 section

5 ‘‘(1) IN GENERAL.—The term ‘qualified trans6 fer’ means a transfer to a special individual retire7 ment account from another such account or from an

8 individual retirement plan but only if such transfer

9 meets the requirements of section 408(d)(3).

10 ‘‘(2) LIMITATION.—A transfer otherwise de11 scribed in paragraph (1) shall not be treated as a

12 qualified transfer if the taxpayer’s adjusted gross in13 come for the taxable year of the transfer exceeds the

14 sum of—

15 ‘‘(A) the applicable dollar amount, plus

16 ‘‘(B) the dollar amount applicable for the

17 taxable year under section 219(g)(2)(A)(ii).

18 This paragraph shall not apply to a transfer from a

19 special individual retirement account to another spe20 cial individual retirement account.

21 ‘‘(3) DEFINITIONS.—For purposes of this sub22 section, the terms ‘adjusted gross income’ and ‘ap23 plicable dollar amount’ have the meanings given

24 such terms by section 219(g)(3), except subpara25 graph (A)(ii) thereof shall be applied without regard
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1 to the phrase ‘or the deduction allowable under this

2 section’.’’

3 (b) EARLY WITHDRAWAL PENALTY.—Section 72(t)

4 is amended by adding at the end the following new para5 graph:

6 ‘‘(6) RULES RELATING TO SPECIAL INDIVIDUAL

7 RETIREMENT ACCOUNTS.—In the case of a special

8 individual retirement account under section 408A—

9 ‘‘(A) this subsection shall only apply to

10 distributions out of such account which consist

11 of earnings allocable to contributions made to

12 the account during the 5-year period ending on

13 the day before such distribution, and

14 ‘‘(B) paragraph (2)(A)(i) shall not apply to

15 any distribution described in subparagraph

16 (A).’’

17 (c) EXCESS CONTRIBUTIONS.—Section 4973(b) is

18 amended by adding at the end the following new sentence:

19 ‘‘For purposes of paragraphs (1)(B) and (2)(C), the

20 amount allowable as a deduction under section 219 shall

21 be computed without regard to section 408A.’’

22 (d) CONFORMING AMENDMENT.—The table of sec23 tions for subpart A of part I of subchapter D of chapter

24 1 is amended by inserting after the item relating to section

25 408 the following new item:

‘‘Sec. 408A. Special individual retirement accounts.’’
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1 (e) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to taxable years beginning after

3 December 31, 1995.

4 Subtitle B—Penalty-Free

5 Distributions

6 SEC. 221. DISTRIBUTIONS FROM CERTAIN PLANS MAY BE

7 USED WITHOUT PENALTY TO PURCHASE

8 FIRST HOMES, TO PAY HIGHER EDUCATION

9 OR FINANCIALLY DEVASTATING MEDICAL EX10 PENSES, OR BY THE UNEMPLOYED.

11 (a) IN GENERAL.—Paragraph (2) of section 72(t)

12 (relating to exceptions to 10-percent additional tax on

13 early distributions from qualified retirement plans) is

14 amended by adding at the end the following new subpara15 graph:

16 ‘‘(D) DISTRIBUTIONS FROM CERTAIN

17 PLANS FOR FIRST HOME PURCHASES OR EDU18 CATIONAL EXPENSES.—Distributions to an in19 dividual from an individual retirement plan—

20 ‘‘(i) which are qualified first-time

21 homebuyer distributions (as defined in

22 paragraph (7)); or

23 ‘‘(ii) to the extent such distributions

24 do not exceed the qualified higher edu-
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1 cation expenses (as defined in paragraph

2 (8)) of the taxpayer for the taxable year.’’

3 (b) FINANCIALLY DEVASTATING MEDICAL EX4 PENSES.—

5 (1) IN GENERAL.—Section 72(t)(3)(A) is

6 amended by striking ‘‘(B),’’.

7 (2) CERTAIN LINEAL DESCENDANTS AND AN8 CESTORS TREATED AS DEPENDENTS AND LONG9 TERM CARE SERVICES TREATED AS MEDICAL

10 CARE.—Subparagraph (B) of section 72(t)(2) is

11 amended by striking ‘‘medical care’’ and all that fol12 lows and inserting ‘‘medical care determined—

13 ‘‘(i) without regard to whether the

14 employee itemizes deductions for such tax15 able year, and

16 ‘‘(ii) in the case of an individual re17 tirement plan—

18 ‘‘(I) by treating such employee’s

19 dependents as including all children,

20 grandchildren and ancestors of the

21 employee or such employee’s spouse

22 and

23 ‘‘(II) by treating qualified long24 term care services (as defined in para-
29

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1 graph (9)) as medical care for pur2 poses of this subparagraph (B).’’

3 (3) CONFORMING AMENDMENT.—Subparagraph

4 (B) of section 72(t)(2) is amended by striking ‘‘or

5 (C)’’ and inserting ‘‘, (C) or (D)’’.

6 (c) DEFINITIONS.—Section 72(t), as amended by this

7 Act, is amended by adding at the end the following new

8 paragraphs:

9 ‘‘(7) QUALIFIED FIRST-TIME HOMEBUYER DIS10 TRIBUTIONS.—For purposes of paragraph

11 (2)(D)(i)—

12 ‘‘(A) IN GENERAL.—The term ‘qualified

13 first-time homebuyer distribution’ means any

14 payment or distribution received by an individ15 ual to the extent such payment or distribution

16 is used by the individual before the close of the

17 60th day after the day on which such payment

18 or distribution is received to pay qualified ac19 quisition costs with respect to a principal resi20 dence of a first-time homebuyer who is such in21 dividual or the spouse, child (as defined in sec22 tion 151(c)(3)), or grandchild of such individ23 ual.

24 ‘‘(B) QUALIFIED ACQUISITION COSTS.—

25 For purposes of this paragraph, the term
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1 ‘qualified acquisition costs’ means the costs of

2 acquiring, constructing, or reconstructing a res3 idence. Such term includes any usual or reason4 able settlement, financing, or other closing

5 costs.

6 ‘‘(C) FIRST-TIME HOMEBUYER; OTHER

7 DEFINITIONS.—For purposes of this para8 graph—

9 ‘‘(i) FIRST-TIME HOMEBUYER.—The

10 term ‘first-time homebuyer’ means any in11 dividual if—

12 ‘‘(I) such individual (and if mar13 ried, such individual’s spouse) had no

14 present ownership interest in a prin15 cipal residence during the 3-year pe16 riod ending on the date of acquisition

17 of the principal residence to which

18 this paragraph applies, and

19 ‘‘(II) subsection (h) or (k) of sec20 tion 1034 did not suspend the run21 ning of any period of time specified in

22 section 1034 with respect to such in23 dividual on the day before the date

24 the distribution is applied pursuant to

25 subparagraph (A).
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1 In the case of an individual described in

2 section 143(i)(1)(C) for any year, an own3 ership interest shall not include any inter4 est under a contract of deed described in

5 such section. An individual who loses an

6 ownership interest in a principal residence

7 incident to a divorce or legal separation is

8 deemed for purposes of this subparagraph

9 to have had no ownership interest in such

10 principal residence within the period re11 ferred to in subparagraph (A)(II).

12 ‘‘(ii) PRINCIPAL RESIDENCE.—The

13 term ‘principal residence’ has the same

14 meaning as when used in section 1034.

15 ‘‘(iii) DATE OF ACQUISITION.—The

16 term ‘date of acquisition’ means the date—

17 ‘‘(I) on which a binding contract

18 to acquire the principal residence to

19 which subparagraph (A) applies is en20 tered into, or

21 ‘‘(II) on which construction or re22 construction of such a principal resi23 dence is commenced.

24 ‘‘(D) SPECIAL RULE WHERE DELAY IN AC25 QUISITION.—If any distribution from any indi-
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1 vidual retirement plan fails to meet the require2 ments of subparagraph (A) solely by reason of

3 a delay or cancellation of the purchase or con4 struction of the residence, the amount of the

5 distribution may be contributed to an individual

6 retirement plan as provided in section

7 408(d)(3)(A)(i) (determined by substituting

8 ‘120 days’ for ‘60 days’ in such section), except

9 that—

10 ‘‘(i) section 408(d)(3)(B) shall not be

11 applied to such contribution, and

12 ‘‘(ii) such amount shall not be taken

13 into account in determining whether sec14 tion 408(d)(3)(A)(i) applies to any other

15 amount.

16 ‘‘(8) QUALIFIED HIGHER EDUCATION EX17 PENSES.—For purposes of paragraph (2)(D)(ii)—

18 ‘‘(A) IN GENERAL.—The term ‘qualified

19 higher education expenses’ means tuition and

20 fees required for the enrollment or attendance

21 of—

22 ‘‘(i) the taxpayer,

23 ‘‘(ii) the taxpayer’s spouse,
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1 ‘‘(iii) a dependent of the taxpayer

2 with respect to whom the taxpayer is al3 lowed a deduction under section 151, or

4 ‘‘(iv) the taxpayer’s child (as defined

5 in section 151(c)(3)) or grandchild,

6 as an eligible student at an institution of higher

7 education (as defined in paragraphs (1)(D) and

8 (2) of section 220(c)).

9 ‘‘(B) EXCEPTIONS.—The term ‘qualified

10 higher education expenses’ does not include ex11 penses described in subparagraphs (B) and (C)

12 of section 220(c)(1).

13 ‘‘(C) COORDINATION WITH SAVINGS BOND

14 PROVISIONS.—The amount of qualified higher

15 education expenses for any taxable year shall be

16 reduced by any amount excludable from gross

17 income under section 135.

18 ‘‘(9) QUALIFIED LONG-TERM CARE SERVICES.—

19 For purposes of paragraph (2)(B)—

20 ‘‘(A) IN GENERAL.—The term ‘qualified

21 long-term care services’ means necessary diag22 nostic, curing, mitigating, treating, preventive,

23 therapeutic, and rehabilitative services, and

24 maintenance and personal care services (wheth-
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1 er performed in a residential or nonresidential

2 setting) which—

3 ‘‘(i) are required by an individual dur4 ing any period the individual is an inca5 pacitated individual (as defined in subpara6 graph (B)),

7 ‘‘(ii) have as their primary purpose—

8 ‘‘(I) the provision of needed as9 sistance with 1 or more activities of

10 daily living (as defined in subpara11 graph (C)), or

12 ‘‘(II) protection from threats to

13 health and safety due to severe cog14 nitive impairment, and

15 ‘‘(iii) are provided pursuant to a con16 tinuing plan of care prescribed by a li17 censed professional (as defined in subpara18 graph (D)).

19 ‘‘(B) INCAPACITATED INDIVIDUAL.—The

20 term ‘incapacitated individual’ means any indi21 vidual who—

22 ‘‘(i) is unable to perform, without sub23 stantial assistance from another individual

24 (including assistance involving cueing or

25 substantial supervision), at least 2 activi-
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1 ties of daily living as defined in subpara2 graph (C), or

3 ‘‘(ii) has severe cognitive impairment

4 as defined by the Secretary in consultation

5 with the Secretary of Health and Human

6 Services.

7 Such term shall not include any individual oth8 erwise meeting the requirements of the preced9 ing sentence unless a licensed professional with10 in the preceding 12-month period has certified

11 that such individual meets such requirements.

12 ‘‘(C) ACTIVITIES OF DAILY LIVING.—Each

13 of the following is an activity of daily living:

14 ‘‘(i) Eating.

15 ‘‘(ii) Toileting.

16 ‘‘(iii) Transferring.

17 ‘‘(iv) Bathing.

18 ‘‘(v) Dressing.

19 ‘‘(D) LICENSED PROFESSIONAL.—The

20 term ‘licensed professional’ means—

21 ‘‘(i) a physician or registered profes22 sional nurse, or

23 ‘‘(ii) any other individual who meets

24 such requirements as may be prescribed by
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1 the Secretary after consultation with the

2 Secretary of Health and Human Services.

3 ‘‘(E) CERTAIN SERVICES NOT IN4 CLUDED.—The term ‘qualified long-term care

5 services’ shall not include any services provided

6 to an individual—

7 ‘‘(i) by a relative (directly or through

8 a partnership, corporation, or other entity)

9 unless the relative is a licensed professional

10 with respect to such services, or

11 ‘‘(ii) by a corporation or partnership

12 which is related (within the meaning of

13 section 267(b) or 707(b)) to the individual.

14 For purposes of this subparagraph, the term

15 ‘relative’ means an individual bearing a rela16 tionship to the individual which is described in

17 paragraphs (1) through (8) of section 152(a).’’

18 (d) PENALTY-FREE DISTRIBUTIONS FOR CERTAIN

19 UNEMPLOYED INDIVIDUALS.—Paragraph (2) of section

20 72(t) is amended by adding at the end the following new

21 subparagraph:

22 ‘‘(E) DISTRIBUTIONS TO UNEMPLOYED IN23 DIVIDUALS.—A distribution from an individual

24 retirement plan to an individual after separa25 tion from employment, if—
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•S 452 IS

1 ‘‘(i) such individual has received un2 employment compensation for 12 consecu3 tive weeks under any Federal or State un4 employment compensation law by reason of

5 such separation, and

6 ‘‘(ii) such distributions are made dur7 ing any taxable year during which such un8 employment compensation is paid or the

9 succeeding taxable year.’’

10 (e) EFFECTIVE DATE.—The amendments made by

11 this section shall apply to payments and distributions after

12 December 31, 1995.

13 SEC. 222. CONTRIBUTIONS MUST BE HELD AT LEAST 5

14 YEARS IN CERTAIN CASES.

15 (a) IN GENERAL.—Section 72(t), as amended by this

16 Act, is amended by adding at the end the following new

17 paragraph:

18 ‘‘(10) CERTAIN CONTRIBUTIONS MUST BE HELD

19 5 YEARS.—

20 ‘‘(A) IN GENERAL.—Paragraph (2)(A)(i)

21 shall not apply to any amount distributed out

22 of an individual retirement plan (other than a

23 special individual retirement account) which is

24 allocable to contributions made to the plan dur25 ing the 5-year period ending on the date of
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1 such distribution (and earnings on such con2 tributions).

3 ‘‘(B) ORDERING RULE.—For purposes of

4 this paragraph, distributions shall be treated as

5 having been made—

6 ‘‘(i) first from the earliest contribu7 tion (and earnings allocable thereto) re8 maining in the account at the time of the

9 distribution, and

10 ‘‘(ii) then from other contributions

11 (and earnings allocable thereto) in the

12 order in which made.

13 Earnings shall be allocated to contributions in

14 such manner as the Secretary may prescribe.

15 ‘‘(C) SPECIAL RULE FOR ROLLOVERS.—

16 ‘‘(i) PENSION PLANS.—Subparagraph

17 (A) shall not apply to distributions out of

18 an individual retirement plan which are al19 locable to rollover contributions to which

20 section 402(c), 403(a)(4), or 403(b)(8) ap21 plied.

22 ‘‘(ii) CONTRIBUTION PERIOD.—For

23 purposes of subparagraph (A), amounts

24 shall be treated as having been held by a

25 plan during any period such contributions
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1 were held (or are treated as held under

2 this clause) by any individual retirement

3 plan from which transferred.

4 ‘‘(D) SPECIAL ACCOUNTS.—For rules ap5 plicable to special individual retirement ac6 counts under section 408A, see paragraph (8).’’

7 (b) EFFECTIVE DATE.—The amendment made by

8 this section shall apply to contributions (and earnings allo9 cable thereto) which are made after December 31, 1995.

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