II

105TH CONGRESS

1ST SESSION S. 1116

To amend the Internal Revenue Code of 1986 to provide tax incentives

for education.

IN THE SENATE OF THE UNITED STATES

JULY 31, 1997

Mr. ROTH (for himself and Mr. COVERDELL) 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 incentives for education.

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 TO 1986 CODE; CO4 ORDINATION WITH TAXPAYER RELIEF ACT

5 OF 1997.

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

7 ‘‘Affordable Education Act’’.

8 (b) AMENDMENT OF 1986 CODE.—Except as other9 wise expressly provided, whenever in this Act an amend10 ment or repeal is expressed in terms of an amendment
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1 to, or repeal of, a section or other provision, the reference

2 shall be considered to be made to a section or other provi3 sion of the Internal Revenue Code of 1986.

4 (c) COORDINATION WITH TAXPAYER RELIEF ACT OF

5 1997.—Any reference in this Act to any section of the

6 Internal Revenue Code of 1986 amended or added by the

7 Taxpayer Relief Act of 1997 shall be a reference to such

8 section as so amended or added.

9 SEC. 2. EXCLUSION FROM GROSS INCOME OF EDUCATION

10 DISTRIBUTIONS FROM QUALIFIED TUITION

11 PROGRAMS; COVERAGE OF PRIVATE PRO12 GRAMS.

13 (a) EXCLUSION.—

14 (1) IN GENERAL.—Subparagraph (B) of section

15 529(c)(3) (relating to distributions) is amended to

16 read as follows:

17 ‘‘(B) DISTRIBUTIONS FOR QUALIFIED

18 HIGHER EDUCATION EXPENSES.—If a distribu19 tee elects the application of this subparagraph

20 for any taxable year—

21 ‘‘(i) no amount shall be includible in

22 gross income by reason of a distribution

23 which consists of providing a benefit to the

24 distributee which, if paid for by the dis-
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1 tributee, would constitute payment of a

2 qualified higher education expense, and

3 ‘‘(ii) the amount which (but for the

4 election) would be includible in gross in5 come by reason of any other distribution

6 shall not be so includible in an amount

7 which bears the same ratio to the amount

8 which would be so includible as the amount

9 of the qualified higher education expenses

10 of the distributee bears to the amount of

11 the distribution.’’.

12 (2) ADDITIONAL TAX ON AMOUNTS NOT USED

13 FOR HIGHER EDUCATION EXPENSES.—Section 529

14 is amended by adding at the end the following new

15 subsection:

16 ‘‘(f) ADDITIONAL TAX FOR DISTRIBUTIONS NOT

17 USED FOR EDUCATIONAL EXPENSES.—

18 ‘‘(1) IN GENERAL.—The tax imposed by section

19 530(d)(4) shall apply to payments and distributions

20 from qualified tuition programs in the same manner

21 as such tax applies to education individual retire22 ment accounts except that section 529(f) shall be

23 applied by reference to qualified higher education ex24 penses.
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1 ‘‘(2) EXCESS CONTRIBUTIONS RETURNED BE2 FORE DUE DATE OF RETURN.—Subparagraph (A)

3 shall not apply to the distribution to a contributor

4 of any contribution paid during a taxable year to a

5 qualified tuition program to the extent that such

6 contribution exceeds the limitation in section

7 4973(e) if such distribution (and the net income

8 with respect to such excess contribution) meet re9 quirements comparable to the requirements of sec10 tion 530(d)(4)(C).’’

11 (3) COORDINATION WITH EDUCATION CRED12 ITS.—Section 25A(e)(2) is amended by inserting

13 ‘‘529(c)(3)(B) or’’ before ‘‘530(d)(2)’’.

14 (4) EFFECTIVE DATE.—The amendments made

15 by this subsection shall apply to distributions after

16 December 31, 1997, for education furnished in aca17 demic periods beginning after such date.

18 (b) ELIGIBLE EDUCATIONAL INSTITUTIONS PER19 MITTED TO MAINTAIN QUALIFIED TUITION PROGRAMS.—

20 (1) IN GENERAL.—Paragraph (1) of section

21 529(b) (defining qualified State tuition program) is

22 amended by inserting ‘‘or by one or more eligible

23 educational institutions’’ after ‘‘maintained by a

24 State or agency or instrumentality thereof’’.
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1 (2) LIMITATION ON CONTRIBUTIONS TO QUALI2 FIED TUITION PROGRAMS NOT MAINTAINED BY A

3 STATE.—Subsection (b) of section 529 is amended

4 by adding at the end the following new paragraph:

5 ‘‘(9) LIMITATION ON CONTRIBUTIONS TO

6 QUALIFIED TUITION PROGRAMS NOT MAINTAINED BY

7 A STATE.—In the case of a program not maintained

8 by a State or agency or instrumentality thereof, such

9 program shall not be treated as a qualified tuition

10 program unless it limits the annual contribution to

11 the program on behalf of a designated beneficiary to

12 $2,000.’’.

13 (3) TAX ON EXCESS CONTRIBUTIONS.—

14 (A) IN GENERAL.—Subsection (a) of sec15 tion 4973 is amended by striking ‘‘or’’ at the

16 end of paragraph (3), by redesignating para17 graph (4) as paragraph (5), and by inserting

18 after paragraph (3) the following new para19 graph:

20 ‘‘(4) a qualified tuition program (as defined in

21 section 529) not maintained by a State or any agen22 cy or instrumentality thereof, or’’.

23 (B) EXCESS CONTRIBUTIONS DEFINED.—

24 Section 4973(e) is amended to read as follows:
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1 ‘‘(e) EXCESS CONTRIBUTIONS TO PRIVATE QUALI2 FIED TUITION PROGRAM AND EDUCATION INDIVIDUAL

3 RETIREMENT ACCOUNTS.—For purposes of this section—

4 ‘‘(1) IN GENERAL.—In the case of private edu5 cation investment accounts maintained for the bene6 fit of any 1 beneficiary, the term ‘excess contribu7 tions’ means the amount by which the amount con8 tributed for the taxable year to such accounts ex9 ceeds $2,000.

10 ‘‘(2) PRIVATE EDUCATION INVESTMENT AC11 COUNT.—For purposes of paragraph (1), the term

12 ‘private education investment account’ means—

13 ‘‘(A) a qualified tuition program (as de14 fined in section 529) not maintained by a State

15 or any agency or instrumentality thereof, and

16 ‘‘(B) an education individual retirement

17 account (as defined in section 530).

18 ‘‘(3) SPECIAL RULES.—For purposes of para19 graph (1), the following contributions shall not be

20 taken into account:

21 ‘‘(A) Any contribution which is distributed

22 out of the education individual retirement ac23 count in a distribution to which section

24 530(d)(4)(C) applies.
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1 ‘‘(B) Any contribution to a qualified tui2 tion program (as so defined) described in sec3 tion 530(b)(2)(B) from any such account.

4 ‘‘(C) Any rollover contribution.’’.

5 (4) CONFORMING AMENDMENTS.—

6 (A) Paragraph (2) of section 26(b) is

7 amended by redesignating subparagraphs (E)

8 through (Q) as subparagraphs (F) through (R),

9 respectively, and by inserting after subpara10 graph (D) the following new subparagraph:

11 ‘‘(E) section 529(f) (relating to additional

12 tax on certain distributions from qualified tui13 tion programs),’’.

14 (B) The text and headings of sections 529

15 and 530 are amended by striking ‘‘qualified

16 State tuition program’’ each place it appears

17 and inserting ‘‘qualified tuition program’’.

18 (C)(i) The section heading of section 529

19 is amended to read as follows:

20 ‘‘SEC. 529. QUALIFIED TUITION PROGRAMS.’’.

21 (ii) The item relating to section 529 in the

22 table of sections for part VIII of subchapter F

23 of chapter 1 is amended by striking ‘‘State’’.
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1 (5) EFFECTIVE DATE.—The amendments made

2 by this subsection shall take effect on January 1,

3 1998.

4 SEC. 3. EXTENSION OF EXCLUSION FOR EMPLOYER-PRO5 VIDED EDUCATIONAL ASSISTANCE.

6 (a) IN GENERAL.—Section 127 (relating to edu7 cational assistance programs) is amended by striking sub8 section (d) and by redesignating subsection (e) as sub9 section (d).

10 (b) REPEAL OF LIMITATION ON GRADUATE EDU11 CATION.—The last sentence of section 127(c)(1) is amend12 ed by striking ‘‘, and such term also does not include any

13 payment for, or the provision of any benefits with respect

14 to, any graduate level course of a kind normally taken by

15 an individual pursuing a program leading to a law, busi16 ness, medical, or other advanced academic or professional

17 degree’’.

18 (c) EFFECTIVE DATES.—

19 (1) EXTENSION.—The amendments made by

20 subsection (a) shall apply to taxable years beginning

21 after December 31, 1996.

22 (2) GRADUATE EDUCATION.—The amendment

23 made by subsection (b) shall apply with respect to

24 expenses relating to courses beginning after Decem25 ber 31, 1996.
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1 SEC. 4. INCREASE IN CONTRIBUTION LIMIT TO EDUCATION

2 INDIVIDUAL RETIREMENT ACCOUNTS; APPLI3 CATION TO ELEMENTARY AND SECONDARY

4 EDUCATION.

5 (a) INCREASE IN MAXIMUM ANNUAL CONTRIBU6 TIONS.—

7 (1) IN GENERAL.—Section 530(b)(1)(A)(iii) of

8 the Internal Revenue Code of 1986 is amended by

9 striking ‘‘$500’’ and inserting ‘‘$2,000’’.

10 (2) CONFORMING AMENDMENTS.—

11 (A) Section 530(d)(4)(C) of such Code is

12 amended by striking ‘‘$500’’ and inserting

13 ‘‘$2,000’’.

14 (B) Section 4973(e)(1)(A) of such Code is

15 amended by striking ‘‘$500’’ and inserting

16 ‘‘$2,000’’.

17 (b) TAX-FREE EXPENDITURES FOR ELEMENTARY

18 AND SECONDARY SCHOOL EXPENSES.—

19 (1) IN GENERAL.—Section 530(b)(2) of the In20 ternal Revenue Code of 1986 is amended to read as

21 follows:

22 ‘‘(2) QUALIFIED EDUCATION EXPENSES.—

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

24 education expenses’ means—
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1 ‘‘(i) qualified higher education ex2 penses (as defined in section 529(e)(3)),

3 and

4 ‘‘(ii) in the case of taxable years be5 ginning after December 31, 2000, qualified

6 elementary and secondary education ex7 penses (as defined in paragraph (4)).

8 Such expenses shall be reduced as provided in

9 section 25A(g)(2).

10 ‘‘(B) QUALIFIED TUITION PROGRAMS.—

11 Such term shall include amounts paid or in12 curred to purchase tuition credits or certifi13 cates, or to make contributions to an account,

14 under a qualified tuition program (as defined in

15 section 529(b)) for the benefit of the beneficiary

16 of the account.’’

17 (2) QUALIFIED ELEMENTARY AND SECONDARY

18 EDUCATION EXPENSES.—Section 530(b) of such

19 Code is amended by adding at the end the following

20 new paragraph:

21 ‘‘(4) QUALIFIED ELEMENTARY AND SECONDARY

22 EDUCATION EXPENSES.—

23 ‘‘(A) IN GENERAL.—The term ‘qualified el24 ementary and secondary education expenses’

25 means tuition, fees, tutoring, special needs serv-
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1 ices, books, supplies, equipment, transportation,

2 and supplementary expenses required for the

3 enrollment or attendance of the designated ben4 eficiary of the trust at a public, private, or sec5 tarian school.

6 ‘‘(B) SPECIAL RULE FOR

7 HOMESCHOOLING.—Such term shall include ex8 penses described in subparagraph (A) required

9 for education provided for homeschooling if the

10 requirements of any applicable State or local

11 law are met with respect to such education.

12 ‘‘(C) SCHOOL.—The term ‘school’ means

13 any school which provides elementary education

14 or secondary education (through grade 12), as

15 determined under State law.’’

16 (3) CONFORMING AMENDMENTS.—Subsections

17 (b)(1) and (d)(2) of section 530 of such Code are

18 each amended by striking ‘‘higher’’ each place it ap19 pears in the text and heading thereof.

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

21 this section shall apply to taxable years beginning after

22 December 31, 1997.

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