```

[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4323 Introduced in House (IH)]

104th CONGRESS
  2d Session
                                H. R. 4323

  To amend the Internal Revenue Code of 1986 to make higher education 
more affordable by providing tax benefits to individuals who save for, 
                     or pay for, higher education.

_______________________________________________________________________

                    IN THE HOUSE OF REPRESENTATIVES

                           September 28, 1996

 Mr. Schumer (for himself and Ms. Slaughter) introduced the following 
      bill; which was referred to the Committee on Ways and Means

_______________________________________________________________________

                                 A BILL

 
  To amend the Internal Revenue Code of 1986 to make higher education 
more affordable by providing tax benefits to individuals who save for, 
                     or pay for, higher education.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Family Affordable College Tuition 
Act of 1996''.

SEC. 2. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

    (a) Deduction Allowed.-- 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 221 as 
section 222 and by inserting after section 220 the following new 
section:

``SEC. 221. HIGHER EDUCATION EXPENSES.

    ``(a) Allowance of Deduction.--In the case of an individual, there 
shall be allowed as a deduction an amount equal to--
            ``(1) the qualified higher education expenses, and
            ``(2) interest on qualified higher education loans,
paid by the taxpayer during the taxable year.
    ``(b) Limitation Based on Modified Adjusted Gross Income.--
            ``(1) In general.--The amount which would (but for this 
        subsection) be taken into account under subsection (a) shall be 
        reduced (but not below zero) by the amount determined under 
        paragraph (2).
            ``(2) Amount of reduction.--The amount determined under 
        this paragraph equals the amount which bears the same ratio to 
        the amount which would be so taken into account as--
                    ``(A) the excess of--
                            ``(i) the taxpayer's modified adjusted 
                        gross income for such taxable year, over
                            ``(ii) $140,000 ($200,000 in the case of a 
                        joint return), bears to
                    ``(B) $20,000.
            ``(3) Modified adjusted gross income.--For purposes of this 
        subsection, the term `modified adjusted gross income' means the 
        adjusted gross income of the taxpayer for the taxable year 
        determined--
                    ``(A) without regard to this section and sections 
                911, 931, and 933, and
                    ``(B) after the application of sections 86, 135, 
                219, 220, and 469.
        For purposes of the sections referred to in subparagraph (B), 
        adjusted gross income shall be determined without regard to the 
        deduction allowed under this section.
            ``(4) Inflation adjustments.--
                    ``(A) In general.--In the case of a taxable year 
                beginning after 1999, the $140,000 and $200,000 amounts 
                described in paragraph (2) shall each be increased by 
                an amount equal to--
                            ``(i) such dollar amounts, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for the 
                        calendar year in which the taxable year begins, 
                        determined by substituting `calendar year 1998' 
                        for `calendar year 1992' in subparagraph (B) 
                        thereof.
                    ``(B) Rounding.--If any amount as adjusted under 
                subparagraph (A) is not a multiple of $5,000, such 
                amount shall be rounded to the next lowest multiple of 
                $5,000.
    ``(c) Qualified Higher Education Expenses.--For purposes of this 
section--
            ``(1) Qualified higher education expenses.--
                    ``(A) In general.--The term `qualified higher 
                education expenses' means--
                            ``(i) tuition and fees charged by an 
                        educational institution and required for the 
                        enrollment or attendance of--
                                    ``(I) the taxpayer,
                                    ``(II) the taxpayer's spouse,
                                    ``(III) any dependent of the 
                                taxpayer with respect to whom the 
                                taxpayer is allowed a deduction under 
                                section 151, or
                                    ``(IV) any grandchild of the 
                                taxpayer,
                        as an eligible student at an institution of 
                        higher education, and
                            ``(ii) reasonable living expenses for such 
                        an individual while away from home and 
                        attending such institution.
                    ``(B) Eligible courses.--Amounts paid for qualified 
                higher education expenses of any individual shall be 
                taken into account under subsection (a) only to the 
                extent such expenses--
                            ``(i) are attributable to courses of 
                        instruction for which credit is allowed toward 
                        a baccalaureate degree by an institution of 
                        higher education or toward a certificate of 
                        required course work at a vocational school, 
                        and
                            ``(ii) are not attributable to any graduate 
                        program of such individual.
                    ``(C) Exception for nonacademic fees.--Such term 
                does not include any student activity fees, athletic 
                fees, insurance expenses, or other expenses unrelated 
                to a student's academic course of instruction.
                    ``(D) Eligible student.--For purposes of 
                subparagraph (A), the term `eligible student' means a 
                student who--
                            ``(i) meets the requirements of section 
                        484(a)(1) of the Higher Education Act of 1965 
                        (20 U.S.C. 1091(a)(1)), as in effect on the 
                        date of the enactment of this section, and
                            ``(ii) is carrying at least one-half the 
                        normal full-time work load for the course of 
                        study the student is pursuing, as determined by 
                        the institution of higher education.
                    ``(E) Identification requirement.--No deduction 
                shall be allowed under subsection (a) to a taxpayer 
                with respect to an eligible student unless the taxpayer 
                includes the name, age, and taxpayer identification 
                number of such eligible student on the return of tax 
                for the taxable year.
            ``(2) Institution of higher education.--The term 
        `institution of higher education' means an institution which--
                    ``(A) is described in section 481 of the Higher 
                Education Act of 1965 (20 U.S.C. 1088), as in effect on 
                the date of the enactment of this section, and
                    ``(B) is eligible to participate in programs under 
                title IV of such Act.
    ``(d) Qualified Higher Education Loan.--For purposes of this 
section--
            ``(1) In general.--The term `qualified higher education 
        loan' means a loan which is--
                    ``(A) made, insured, or guaranteed by the Federal 
                Government,
                    ``(B) made by a State or a political subdivision of 
                a State,
                    ``(C) made from the proceeds of a qualified student 
                loan bond under section 144(b), or
                    ``(D) made by an institution of higher education 
                (as defined in section 1201(a) of the Higher Education 
                Act of 1965 (20 U.S.C. 1141(a))).
            ``(2) Limitation.--The amount of interest on a qualified 
        higher education loan which is taken into account under 
        subsection (a)(2) shall not exceed the amount which bears the 
        same ratio to such amount of interest as--
                    ``(A) the proceeds from such loan used for 
                qualified higher education expenses, bears to
                    ``(B) the total proceeds from such loan.
        For purposes of the preceding sentence, the term `qualified 
        higher education expenses' shall be determined without regard 
        to subsection (c)(1)(A)(i)(IV).
    ``(e) Special Rules.--
            ``(1) No double benefit.--
                    ``(A) In general.--No deduction shall be allowed 
                under subsection (a) for any expense for which a 
                deduction is allowable to the taxpayer under any other 
                provision of this chapter unless the taxpayer 
                irrevocably waives his right to the deduction of such 
                expense under such other provision.
                    ``(B) Dependents.--No deduction shall be allowed 
                under subsection (a) to any individual with respect to 
                whom a deduction under section 151 is allowable to 
                another taxpayer for a taxable year beginning in the 
                calendar year in which such individual's taxable year 
                begins.
                    ``(C) Savings bond exclusion.--A deduction shall be 
                allowed under subsection (a) for qualified higher 
                education expenses only to the extent the amount of 
                such expenses exceeds the amount excludable under 
                section 135 for the taxable year.
            ``(2) Limitation on taxable year of deduction.--
                    ``(A) In general.--A deduction shall be allowed 
                under subsection (a) for qualified higher education 
                expenses for any taxable year only to the extent such 
                expenses are in connection with enrollment at an 
                institution of higher education during the taxable 
                year.
                    ``(B) Certain prepayments allowed.--Subparagraph 
                (A) shall not apply to qualified higher education 
                expenses paid during a taxable year if such expenses 
                are in connection with an academic term beginning 
                during such taxable year or during the first 3 months 
                of the next taxable year.
            ``(3) Adjustment for certain scholarships and veterans 
        benefits.--The amount of qualified higher education expenses 
        otherwise taken into account under subsection (a) or (d)(2) 
        with respect to the education of an individual shall be reduced 
        (before the application of subsection (b)) by the sum of the 
        amounts received with respect to such individual for the 
        taxable year as--
                    ``(A) a qualified scholarship which under section 
                117 is not includable in gross income,
                    ``(B) an educational assistance allowance under 
                chapter 30, 31, 32, 34, or 35 of title 38, United 
                States Code, or
                    ``(C) a payment (other than a gift, bequest, 
                devise, or inheritance within the meaning of section 
                102(a)) for educational expenses, or attributable to 
                enrollment at an eligible educational institution, 
                which is exempt from income taxation by any law of the 
                United States.
            ``(4) No deduction for married individuals filing separate 
        returns.--If the taxpayer is a married individual (within the 
        meaning of section 7703), this section shall apply only if the 
        taxpayer and the taxpayer's spouse file a joint return for the 
        taxable year.
            ``(5) Nonresident aliens.--If the taxpayer is a nonresident 
        alien individual for any portion of the taxable year, this 
        section shall apply only if such individual is treated as a 
        resident alien of the United States for purposes of this 
        chapter by reason of an election under subsection (g) or (h) of 
        section 6013.
            ``(6) Regulations.--The Secretary may prescribe such 
        regulations as may be necessary or appropriate to carry out 
        this section, including regulations requiring recordkeeping and 
        information reporting.''
    (b) Deduction Allowed in Computing Adjusted Gross Income.--Section 
62(a) of such Code is amended by inserting after paragraph (16) the 
following new paragraph:
            ``(17) Higher education expenses.--The deduction allowed by 
        section 221.''
    (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 221 and inserting:

                              ``Sec. 221. Higher education expenses.
                              ``Sec. 222. Cross reference.''
    (d) Effective Date.--The amendments made by this section shall 
apply to payments made after December 31, 1995.

SEC. 3. EDUCATION SAVINGS PLANS.

    (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. EDUCATION SAVINGS PLANS.

    ``(a) Deduction Allowed.--In the case of an individual, there shall 
be allowed as a deduction the amount paid in cash during the taxable 
year by such individual to an education savings plan established for 
the purpose of accumulating funds to pay the qualified higher education 
expenses of individual who is an eligible individual with respect to 
the taxpayer.
    ``(b) Limitations.--
            ``(1) In general.--The amount allowable as a deduction 
        under subsection (a) to the taxpayer for any taxable year with 
        respect to amounts paid to the education savings plan of each 
        eligible individual shall not exceed $4,000.
            ``(2) Limitation based on modified adjusted gross income.--
        The $4,000 amount in paragraph (1) shall be reduced (but not 
        below zero) by the amount which bears the same ratio to $4,000 
        as--
                    ``(A) the excess of--
                            ``(i) the taxpayer's modified adjusted 
                        gross income for such taxable year, over
                            ``(ii) the dollar amount applicable to the 
                        taxpayer for such taxable year under section 
                        221(b)(2)(A)(ii), bears to
                    ``(B) $20,000.
            ``(3) Modified adjusted gross income.--For purposes of this 
        subsection, the term `modified adjusted gross income' means the 
        adjusted gross income of the taxpayer for the taxable year 
        determined--
                    ``(A) without regard to this section and sections 
                911, 931, and 933, and
                    ``(B) after the application of sections 86, 135, 
                219, 220, 221, and 469.
        For purposes of the sections referred to in subparagraph (B), 
        adjusted gross income shall be determined without regard to the 
        deduction allowed under this section.
            ``(3) Plan may not be established for benefit of more than 
        1 individual.--An education savings plan may not be established 
        for the benefit of more than 1 individual.
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Eligible individual.--The term `eligible individual' 
        means an individual who is--
                    ``(A) the taxpayer,
                    ``(B) the taxpayer's spouse,
                    ``(C) any dependent of the taxpayer with respect to 
                whom the taxpayer is allowed a deduction under section 
                151, or
                    ``(D) any grandchild of the taxpayer.
            ``(2) Education savings plan.--The term `education savings 
        plan' means a trust created or organized in the United States 
        exclusively for the purpose of paying the qualified higher 
        education expenses of an eligible individual, but only if the 
        written governing instrument creating the trust meets the 
        following requirements:
                    ``(A) No contribution will be accepted unless it is 
                in cash, and contributions will not be accepted for any 
                taxable year in excess of $4,000.
                    ``(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.
                    ``(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.
            ``(3) 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 (including extensions thereof).
            ``(4) Qualified higher education expenses.--The term 
        `qualified higher education expenses' has the meaning given 
        such term by section 221(c).
            ``(5) Institution of higher education.--The term 
        `institution of higher education' has the meaning given such 
        term by section 221(c).
    ``(d) Tax Treatment of Distributions.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, any amount paid or distributed out of an education 
        savings plan shall be included in gross income of the payee or 
        distributee for the taxable year in which the payment or 
        distribution is received to the extent such amount is not the 
        return of a contribution for which no deduction was allowed 
        under subsection (a).
            ``(2) Distribution used to pay qualified higher education 
        expenses.--Paragraph (1) shall not apply to any payment or 
        distribution out of an education savings plan to the extent 
        such payment or distribution is used exclusively to pay the 
        qualified higher education expenses incurred by the individual 
        for whose benefit the plan is established while such individual 
        is an eligible student (as defined in section 221).
            ``(3) Distributions to another plan or to institution of 
        higher education.--Paragraph (1) shall not apply to any 
        distribution under subsection (c)(2)(E)(ii).
            ``(4) Excess contributions returned before due date of 
        return.--Paragraph (1) does not apply to the distribution of 
        any contribution paid during a taxable year to an education 
        savings plan to the extent that such contribution exceeds the 
        amount allowable as a deduction under subsection (a) for 
        contributions to such plan if--
                    ``(A) such distribution is received on or before 
                the day prescribed by law (including extensions of 
                time) for filing such individual's return for such 
                taxable year,
                    ``(B) no deduction is allowed under subsection (a) 
                with respect to such excess contribution, and
                    ``(C) such distribution is accompanied by the 
                amount of net income attributable to such excess 
                contribution.
        Any net income described in subparagraph (C) shall be included 
        in the gross income of the individual for the taxable year in 
        which such excess contribution was made.
    ``(e) Tax Treatment of Plans.--
            ``(1) Exemption from tax.--An education savings plan is 
        exempt from taxation under this subtitle unless such plan has 
        ceased to be an education savings plan by reason of paragraph 
        (3). Notwithstanding the preceding sentence, any such plan is 
        subject to the taxes imposed by section 511 (relating to 
        imposition of tax on unrelated business income of charitable, 
        etc. organizations).
            ``(2) Amount in plan not to affect eligibility for other 
        federal assistance.--Amounts held in any education savings plan 
        shall not be taken into account in determining the eligibility 
        for, or the amount of, any grant under any Federal student 
        assistance program.
            ``(3) Loss of exemption of plan where individual engages in 
        prohibited transaction.--
                    ``(A) In general.--If the individual for whose 
                benefit an education savings plan is established or any 
                individual who contributes to such plan engages in any 
                transaction prohibited by section 4975 with respect to 
                the plan, the plan shall cease to be an education 
                savings plan as of the first day of the taxable year 
                (of the individual so engaging in such transaction) 
                during which such transaction occurs.
                    ``(B) Plan treated as distributing all its 
                assets.--In any case in which any plan ceases to be an 
                education savings plan by reason of subparagraph (A) as 
                of the first day of any taxable year, paragraph (1) of 
                subsection (d) shall apply as if there was a 
                distribution on such first day in an amount equal to 
                the fair market value (on such first day) of all assets 
                in the plan (on such first day).
            ``(4) Effect of pledging plan as security.--If, during any 
        taxable year, the individual for whose benefit an education 
        savings plan is established, or any individual who contributes 
        to such plan, uses the plan or any portion thereof as security 
        for a loan, the portion so used shall be treated as distributed 
        to the individual so using such portion.
    ``(f) Additional Tax on Certain Amounts Included in Gross Income.--
            ``(1) Distribution not used for qualified higher education 
        expenses.--In the case of any payment or distribution to which 
        subsection (d)(1) applies, the tax liability of each payee or 
        distributee under this chapter for the taxable year in which 
        the payment or distribution is received shall be increased by 
        an amount equal to 10 percent of the amount of the distribution 
        which is includible in the gross income of such payee or 
        distributee for such taxable year.
            ``(2) Disqualification cases.--If an amount is includible 
        in the gross income of an individual for a taxable year because 
        such amount is required to be treated as a distribution under 
        paragraph (2) or (3) of subsection (e), such individual's tax 
        liability under this chapter for such taxable year shall be 
        increased by an amount equal to 10 percent of such amount 
        required to be treated as a distribution and included in his 
        gross income.
            ``(3) Disability or death cases.--Paragraphs (1) and (2) 
        shall not apply if the payment or distribution is made after 
        the individual for whose benefit the education savings plan 
        becomes disabled within the meaning of section 72(m)(7) or 
        dies.
    ``(g) Community Property Laws.--This section shall be applied 
without regard to any community property laws.
    ``(h) Custodial Plans.--For purposes of this section, a custodial 
plan shall be treated as a trust if the assets of such plan 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 plan will be consistent with the 
requirements of this section, and if the custodial plan would, except 
for the fact that it is not a trust, constitute an education savings 
plan described in subsection (c)(2). For purposes of this title, in the 
case of a custodial plan treated as a trust by reason of the preceding 
sentence, the custodian of such plan shall be treated as the trustee 
thereof.
    ``(i) Reports.--The trustee of an education savings plan shall make 
such reports regarding such plan to the Secretary and to the individual 
for whose benefit the plan is maintained 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) Deduction Allowed in Arriving at Adjusted Gross Income.--
Paragraph (7) of section 62(a) of such Code (relating to retirement 
savings) is amended--
            (1) by inserting ``or education'' after ``Retirement'' in 
        the heading of such paragraph, and
            (2) by inserting before the period at the end the 
        following: ``and the deduction allowed by section 222 (relating 
        to education savings plans)''.
    (c) Tax on Excess Contributions.--Section 4973 of such Code 
(relating to tax on excess contributions to individual retirement 
plans, certain section 403(b) contracts, and certain individual 
retirement annuities) is amended--
            (1) by inserting ``education savings plans,'' after 
        ``medical savings accounts,'' in the heading of such section,
            (2) by striking ``or'' at the end of paragraph (1) of 
        subsection (a),
            (3) by redesignating paragraph (3) of subsection (a) as 
        paragraph (4) and by inserting after paragraph (2) the 
        following new paragraph:
            ``(3) an education savings plan (within the meaning of 
        section 222(c)(2)), or'', and
            (4) by adding at the end the following new subsection:
    ``(e) Excess Contributions to Education Savings Plans.--For 
purposes of this section, in the case of an education savings plan, the 
term `excess contributions' means the amount by which the amount 
contributed for the taxable year to the plan exceeds the amount 
allowable as a deduction under section 222 for such taxable year. For 
purposes of this subsection, any contribution which is distributed out 
of the education savings plan in a distribution to which section 
222(d)(4) applies shall be treated as an amount not contributed.''
    (d) Contribution Not Subject to Gift Tax.--Section 2503 of such 
Code (relating to taxable gifts) is amended by adding at the end the 
following new subsection:
    ``(h) Education Savings Plans.--Any contribution made by an 
individual to an education savings plan described in section 222(c)(2) 
which is allowable as a deduction under section 222 shall not be 
treated as a transfer of property by gift for purposes of this 
chapter.''
    (e) Tax on Prohibited Transactions.--
            (1) Section 4975 of such Code (relating to prohibited 
        transactions) is amended by adding at the end of subsection (c) 
        the following new paragraph:
            ``(5) Special rule for education savings plans.--An 
        individual for whose benefit an education savings plan is 
        established and any contributor to such plan shall be exempt 
        from the tax imposed by this section with respect to any 
        transaction concerning such plan (which would otherwise be 
        taxable under this section) if, with respect to such 
        transaction, the plan ceases to be an education savings plan by 
        reason of the application of section 222(e)(2)(A) to such 
        plan.''
            (2) Paragraph (1) of section 4975(e) is amended 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) an education savings plan described in 
                section 222(c)(2), or''.
    (f) Failure To Provide Reports on Education Savings Plans.--
            (1) Paragraph (2) of section 6693(a) of such Code (relating 
        to failure to provide reports on individual retirement plans or 
        annuities) is amended 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 220(i) (relating to education savings 
                plans).''
            (2) The section heading for section 6693 of such Code is 
        amended by inserting ``or on education savings plans'' after 
        ``annuities''.
    (g) Special Rule for Determining Amounts of Support for 
Dependent.--Subsection (b) of section 152 of such Code (relating to 
definition of dependent) is amended by adding at the end the following 
new paragraph:
            ``(6) A distribution from an education savings plan 
        described in section 222(c)(2) to the individual for whose 
        benefit such plan has been established shall not be taken into 
        plan in determining support for purposes of this section to the 
        extent such distribution is excluded from gross income of such 
        individual under section 222(d)(2).''
    (h) Clerical Amendments.--
            (1) 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 the following new items:

                              ``Sec. 222. Education savings plans.
                              ``Sec. 223. Cross references.''
            (2) The table of sections for chapter 43 of such Code is 
        amended by striking the item relating to section 4973 and 
        inserting the following new item:

                              ``Sec. 4973. Tax on excess contributions 
                                        to individual retirement 
                                        accounts, medical savings 
                                        accounts, education savings 
                                        plans, certain 403(b) 
                                        contracts, and certain 
                                        individual retirement 
                                        annuities.''
            (3) The table of sections for subchapter B of chapter 68 of 
        such Code is amended by striking the item relating to section 
        6693 and inserting the following new item:

                              ``Sec. 6693. Failure to provide reports 
                                        on individual retirement 
                                        accounts or annuities or on 
                                        education savings plans.''
    (i) Effective Date.--The amendments made by this section shall 
apply to contributions made in taxable years beginning after December 
31, 1995.
                                 <all>
```