II 

109TH CONGRESS 

2D SESSION S. 3940 

To amend the Internal Revenue Code of 1986 to extend and expand tax 

incentives that promote affordable education. 

IN THE SENATE OF THE UNITED STATES 

SEPTEMBER 26, 2006 

Mr. SMITH (for himself and Mrs. LINCOLN) 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 extend 

and expand tax incentives that promote affordable 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. 

4 This Act may be cited as the ‘‘Educational Oppor5 tunity and Affordability Act of 2006’’. 

6 SEC. 2. EXTENSION AND EXPANSION OF ABOVE-THE-LINE 

7 DEDUCTION FOR CERTAIN EXPENSES OF EL8 EMENTARY AND SECONDARY SCHOOL 

9 TEACHERS. 

10 (a) IN GENERAL.— 


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1 (1) IN GENERAL.—Subparagraph (D) of section 

2 62(a)(2) of the Internal Revenue Code of 1986 (re3 lating to certain expenses of elementary and sec4 ondary school teachers) is amended to read as fol5 lows: 

6 ‘‘(D) CERTAIN EXPENSES OF ELEMENTARY

7 AND SECONDARY SCHOOL TEACHERS.— 

8 ‘‘(i) IN GENERAL.—The deductions al9 lowed by section 162 which consist of ex10 penses, not in excess of $450, paid or in11 curred by an eligible educator— 

12 ‘‘(I) in connection with books, 

13 supplies (other than nonathletic sup14 plies for courses of instruction in 

15 health or physical education), com16 puter equipment (including related 

17 software services) and other equip18 ment, and supplementary materials 

19 used by the eligible educator, and 

20 ‘‘(II) for the professional develop21 ment of the eligible educator. 

22 ‘‘(ii) INFLATION ADJUSTMENT.—In 

23 the case of any taxable year beginning 

24 after 2006, the $450 dollar amount under 


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1 clause (i) shall be increased by an amount 

2 equal to— 

3 ‘‘(I) such dollar amount, multi4 plied by 

5 ‘‘(II) the cost-of-living adjust6 ment determined under section 1(f)(3) 

7 for the calendar year in which the tax8 able year begins, determined by sub9 stituting ‘calendar year 2005’ for ‘cal10 endar year 1992’ in subparagraph (B) 

11 thereof. 

12 If any amount as adjusted under the pre13 ceding sentence is not a multiple of $10, 

14 such amount shall be rounded to the next 

15 lowest multiple of $10.’’. 

16 (b) ELIGIBLE EDUCATOR.— 

17 (1) MODIFICATION TO HOURS REQUIREMENT.— 

18 Subparagraph (A) of section 62(d)(1) of the Internal 

19 Revenue Code of 1986 (relating to eligible educator) 

20 is amended by striking ‘‘900 hours’’ and inserting 

21 ‘‘450 hours’’. 

22 (2) INCLUSION OF ATHLETIC COACHES, TRAIN23 ERS, AND ASSISTANTS.—Subparagraph (A) of sec24 tion 62(d)(1) of such Code is amended by striking 


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1 ‘‘or aide’’ and inserting ‘‘aide, or athletic coach, 

2 trainer, or assistant’’. 

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

4 this section shall apply to taxable years beginning after 

5 December 31, 2005. 

6 SEC. 3. EXPANSION OF EDUCATIONAL EXPENSES ALLOWED 

7 AS PART OF HOPE SCHOLARSHIP CREDIT. 

8 (a) CREDIT ALLOWED FOR FIRST 3 YEARS OF POST9 SECONDARY EDUCATION.—Subparagraph (C) of section 

10 25A(b)(2) of the Internal Revenue Code of 1986 (relating 

11 to credit allowed only for first 2 years of postsecondary 

12 education) is amended by striking ‘‘2’’ in both the heading 

13 and the text and inserting ‘‘3’’. 

14 (b) QUALIFIED TUITION AND RELATED EXPENSES

15 EXPANDED TO INCLUDE BOOKS, SUPPLIES, AND EQUIP16 MENT.—Paragraph (1) of section 25A(f) of the Internal 

17 Revenue Code of 1986 (defining qualified tuition and re18 lated expenses) is amended by adding at the end the fol19 lowing new subparagraph: 

20 ‘‘(D) ADDITIONAL EXPENSES ALLOWED

21 FOR HOPE SCHOLARSHIP CREDIT.—For pur22 poses of the Hope Scholarship Credit, such 

23 term shall include fees, books, supplies, and 

24 equipment required for courses of instruction at 

25 the eligible educational institution.’’. 


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1 (c) HOPE SCHOLARSHIP CREDIT NOT REDUCED BY

2 FEDERAL PELL GRANTS AND SUPPLEMENTAL EDU3 CATIONAL OPPORTUNITY GRANTS.—Subsection (g) of sec4 tion 25A of such Code (relating to special rules) is amend5 ed by adding at the end the following new paragraph: 

6 ‘‘(8) PELL AND SEOG GRANTS.—For purposes 

7 of the Hope Scholarship Credit, paragraph (2) shall 

8 not apply to amounts paid for an individual as a 

9 Federal Pell Grant or a Federal supplemental edu10 cational opportunity grant under subparts 1 and 3, 

11 respectively, of part A of title IV of the Higher Edu12 cation Act of 1965 (20 U.S.C. 1070a and 1070b et 

13 seq., respectively).’’. 

14 (d) EXPANDED HOPE EXPENSES NOT SUBJECT TO

15 INFORMATION REPORTING REQUIREMENTS.—Subsection 

16 (e) of section 6050S of such Code (relating to definitions) 

17 is amended by striking ‘‘subsection (g)(2)’’ and inserting 

18 ‘‘subsections (f)(1)(D) and (g)(2)’’. 

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

20 this section shall apply to expenses paid after December 

21 31, 2006 (in tax years ending after such date), for edu22 cation furnished in academic periods beginning after such 

23 date. 


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1 SEC. 4. INCREASED EMPLOYER PROVIDED EDUCATIONAL 

2 ASSISTANCE. 

3 (a) IN GENERAL.—Paragraph (2) of section 127(a) 

4 of the Internal Revenue Code of 1986 (relating to exclu5 sion from gross income) is amended to read as follows: 

6 ‘‘(2) MAXIMUM EXCLUSION.— 

7 ‘‘(A) IN GENERAL.—If, but for this para8 graph, this section would exclude from gross in9 come more than $8,000 of educational assist10 ance furnished to an individual during a cal11 endar year, this section shall apply only to the 

12 first $8,000 of such assistance so furnished. 

13 ‘‘(B) INFLATION ADJUSTMENT.— 

14 ‘‘(i) IN GENERAL.—In the case of a 

15 calendar year beginning after 2007, the 

16 $8,000 amount in subparagraph (A) shall 

17 be increased by an amount equal to— 

18 ‘‘(I) such dollar amount, multi19 plied by 

20 ‘‘(II) the cost-of-living adjust21 ment determined under section 1(f)(3) 

22 for the calendar year, determined by 

23 substituting ‘calendar year 2006’ for 

24 ‘calendar year 1992’ in subparagraph 

25 (B) thereof. 


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1 ‘‘(ii) ROUNDING.—If any amount as 

2 adjusted under clause (i) is not a multiple 

3 of $100, such amount shall be rounded to 

4 the next lowest multiple of $100.’’. 

5 (b) REPEAL OF EGTRRA SUNSET.—Section 901 of 

6 the Economic Growth and Tax Relief Reconciliation Act 

7 of 2001 shall not apply to section 411 of such Act. 

8 (c) EFFECTIVE DATE.—The amendment made by 

9 this section shall apply to taxable years beginning after 

10 December 31, 2006. 

11 SEC. 5. INCREASED DEDUCTION FOR STUDENT LOAN IN12 TEREST. 

13 (a) INCREASE IN DEDUCTION AMOUNT; REMOVAL OF

14 INCOME CAPS.—Subsection (b) section 221 of the Internal 

15 Revenue Code of 1986 (relating to maximum deduction) 

16 is amended to read as follows: 

17 ‘‘(b) MAXIMUM DEDUCTION.—The deduction allowed 

18 by subsection (a) for the taxable year shall not exceed 

19 $3,500.’’. 

20 (b) APPLICATION OF EGTRRA SUNSET.—The 

21 amendment made by subsection (a) shall be subject to sec22 tion 901 of the Economic Growth and Tax Relief Rec23 onciliation Act of 2001 to the same extent and in the same 

24 manner as section 412(b) of such Act. 


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1 (c) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2006. 

4 SEC. 6. EXTENSION AND EXPANSION OF QZABS. 

5 (a) EXTENSION.—Section 1397E(e)(1) of the Inter6 nal Revenue Code of 1986 (relating to national limitation) 

7 is amended by striking ‘‘and 2005’’ and inserting ‘‘2005, 

8 2006, 2007, 2008, 2009, and 2010’’. 

9 (b) EXPANSION OF QUALIFIED ZONE ACADEMY

10 BONDS FOR PUBLIC SCHOOLS IN COUNTIES WITH NA11 TIONAL FOREST SYSTEM LANDS AND RURAL COUN12 TIES.— 

13 (1) IN GENERAL.—Section 1397E(f) of the In14 ternal Revenue Code of 1986 (relating to other defi15 nitions) is amended by adding at the end the fol16 lowing new paragraph: 

17 ‘‘(4) QUALIFIED ZONE ACADEMY BOND.—The 

18 term ‘qualified zone academy bond’ means any quali19 fied zone academy bond described in subsection (d) 

20 and any qualified zone academy bond described in 

21 subsection (j).’’. 

22 (2) QUALIFIED ZONE ACADEMY BONDS FOR

23 PUBLIC SCHOOLS IN COUNTIES WITH NATIONAL

24 FOREST SYSTEM LANDS AND RURAL COUNTIES.— 

25 Section 1397E of the Internal Revenue Code of 


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1 1986 (relating to credit for holders of qualified zone 

2 academy bonds) is amended by adding at the end 

3 the following new subsection: 

4 ‘‘(j) QUALIFIED ZONE ACADEMY BOND DESCRIBED

5 IN SUBSECTION (j).—For purposes of this section— 

6 ‘‘(1) IN GENERAL.—The term ‘qualified zone 

7 academy bond described in subsection (j)’ means any 

8 bond issued as part of an issue if— 

9 ‘‘(A) 95 percent or more of the proceeds of 

10 such issue are to be used for a qualified pur11 pose with respect to a qualified zone academy, 

12 ‘‘(B) the bond is issued by a State on be13 half of an eligible county within the jurisdiction 

14 of which such school is located or by such an 

15 eligible county, 

16 ‘‘(C) the issuer— 

17 ‘‘(i) designates such bond for purposes 

18 of this section, and 

19 ‘‘(ii) certifies that it has the written 

20 approval of the eligible county for such 

21 bond issuance, 

22 ‘‘(D) the term of each bond which is part 

23 of such issue does not exceed the maximum 

24 term permitted under subsection (d)(3), and 


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1 ‘‘(E) the issue meets the requirements of 

2 paragraphs (6), (7), (8), and (9). 

3 ‘‘(2) QUALIFIED ZONE ACADEMY.—For pur4 poses of this subsection, the term ‘qualified zone 

5 academy’ means any public school which is located 

6 in an eligible county and provides education or train7 ing below the postsecondary level. 

8 ‘‘(3) ELIGIBLE COUNTY.—For purposes of this 

9 subsection, the term ‘eligible county’ means any 

10 county— 

11 ‘‘(A) which received payments under the 

12 Secure Rural Schools Act for fiscal year 2006, 

13 or 

14 ‘‘(B) within which there is a qualified zone 

15 academy with a locale code of 7 or 8, or which 

16 is otherwise designated as a rural school, as de17 termined by the Secretary of Education. 

18 ‘‘(4) QUALIFIED PURPOSE.—For purposes of 

19 this subsection, the term ‘qualified purpose’ means, 

20 with respect to any qualified zone academy, any cap21 ital expenditure, employees’ salaries, or any other 

22 purpose described in subsection (d)(5). 

23 ‘‘(5) LIMITATION ON AMOUNT OF BONDS DES24 IGNATED.— 


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1 ‘‘(A) NATIONAL LIMITATION.—There is a 

2 national limitation for qualified zone academy 

3 bonds described in subsection (j) for each cal4 endar year. Such limitation is $400,000,000 for 

5 2006, 2007, 2008, 2009, and 2010, and, except 

6 as provided in subparagraph (D), zero there7 after. 

8 ‘‘(B) ALLOCATION OF LIMITATION.—The 

9 national limitation for qualified zone academy 

10 bonds described in subsection (j) for a calendar 

11 year shall be allocated by the Secretary among 

12 the States with respect to the eligible counties 

13 located in each such State. Such allocation limi14 tation shall be determined by the Secretary and 

15 shall be based on— 

16 ‘‘(i) the ratio of county payments re17 ceived by a county for such fiscal year 

18 under the Secure Rural Schools Act bears 

19 to the total amount of such payments for 

20 all eligible counties for such fiscal year, 

21 and 

22 ‘‘(ii) the population of a county. 

23 The limitation amount allocated by a State to 

24 an eligible county under this subparagraph shall 


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1 be allocated by the eligible county to qualified 

2 zone academies within such county. 

3 ‘‘(C) DESIGNATION SUBJECT TO LIMITA4 TION AMOUNT.—The maximum aggregate face 

5 amount of bonds issued during any calendar 

6 year which may be designated under paragraph 

7 (1) with respect to any qualified zone academy 

8 shall not exceed the limitation amount allocated 

9 to such academy under subparagraph (B) for 

10 such calendar year. 

11 ‘‘(D) CARRYOVER OF UNUSED LIMITA12 TION.—If for any calendar year— 

13 ‘‘(i) the limitation amount for any eli14 gible county, exceeds 

15 ‘‘(ii) the amount of bonds issued dur16 ing such year which are designated under 

17 paragraph (1) with respect to qualified 

18 zone academies within such county, 

19 the limitation amount for such county for the 

20 following calendar year shall be increased by 

21 the amount of such excess. Any carryforward of 

22 a limitation amount may be carried only to the 

23 first 2 years following the unused limitation 

24 year. For purposes of the preceding sentence, a 


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1 limitation amount shall be treated as used on a 

2 first-in first-out basis. 

3 ‘‘(6) RATABLE PRINCIPAL AMORTIZATION RE4 QUIRED.—An issue shall be treated as meeting the 

5 requirements of this paragraph if such issue pro6 vides for an equal amount of principal to be paid by 

7 the issuer during each calendar year that the issue 

8 is outstanding. 

9 ‘‘(7) SPECIAL RULES RELATING TO EXPENDI10 TURES.— 

11 ‘‘(A) IN GENERAL.—An issue shall be 

12 treated as meeting the requirements of this 

13 paragraph if, as of the date of issuance, the 

14 issuer reasonably expects— 

15 ‘‘(i) at least 95 percent of the pro16 ceeds from the sale of the issue are to be 

17 spent for 1 or more qualified purposes with 

18 respect to qualified zone academies within 

19 the 5-year period beginning on the date of 

20 issuance of the qualified zone academy 

21 bond described in subsection (j), 

22 ‘‘(ii) a binding commitment with a 

23 third party to spend at least 10 percent of 

24 the proceeds from the sale of the issue will 

25 be incurred within the 6-month period beVerDate Aug 31 2005 23:02 Sep 27, 2006 Jkt 049200 PO 00000 Frm 00013 Fmt 6652 Sfmt 6201 E:\BILLS\S3940.IS S3940

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1 ginning on the date of issuance of the 

2 qualified zone academy bond described in 

3 subsection (j), and 

4 ‘‘(iii) such purposes will be completed 

5 with due diligence and the proceeds from 

6 the sale of the issue will be spent with due 

7 diligence. 

8 ‘‘(B) EXTENSION OF PERIOD.—Upon sub9 mission of a request prior to the expiration of 

10 the period described in subparagraph (A)(i), the 

11 Secretary may extend such period if the issuer 

12 establishes that the failure to satisfy the 5-year 

13 requirement is due to reasonable cause and the 

14 related purposes will continue to proceed with 

15 due diligence. 

16 ‘‘(C) FAILURE TO SPEND REQUIRED

17 AMOUNT OF BOND PROCEEDS WITHIN 5

18 YEARS.—To the extent that less than 95 per19 cent of the proceeds of such issue are expended 

20 by the close of the 5-year period beginning on 

21 the date of issuance (or if an extension has 

22 been obtained under subparagraph (B), by the 

23 close of the extended period), the issuer shall 

24 redeem all of the nonqualified bonds within 90 

25 days after the end of such period. For purposes 


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1 of this subparagraph, the amount of the non2 qualified bonds required to be redeemed shall be 

3 determined in the same manner as under sec4 tion 142. 

5 ‘‘(8) SPECIAL RULES RELATING TO ARBI6 TRAGE.—An issue shall be treated as meeting the 

7 requirements of this paragraph if the issuer satisfies 

8 the arbitrage requirements of section 148 with re9 spect to proceeds of the issue. 

10 ‘‘(9) REPORTING.—Issuers of qualified zone 

11 academy bonds described in subsection (j) shall sub12 mit reports similar to the reports required under 

13 section 149(e). 

14 ‘‘(10) APPLICATION OF SPECIAL RULES.—For 

15 purposes of this subsection, rules similar to the rules 

16 under paragraphs (3) and (4) of section 54(i) shall 

17 apply.’’. 

18 (3) NO LIMITATION ON TAXPAYERS ELIGIBLE

19 FOR CREDIT.—Section 1397E(a) of the Internal 

20 Revenue Code of 1986 is amended by striking ‘‘In 

21 the case of an eligible taxpayer who holds a qualified 

22 academy zone bond’’ and inserting ‘‘In the case of 

23 an eligible taxpayer who holds a qualified academy 

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1 payer who holds a qualified academy zone bond de2 scribed in subsection (j)’’. 

3 (4) CONFORMING AMENDMENTS.— 

4 (A) So much of subsection (d) of section 

5 1397E of the Internal Revenue Code of 1986 as 

6 precedes subparagraph (A) of paragraph (1) is 

7 amended to read as follows: 

8 ‘‘(d) QUALIFIED ZONE ACADEMY BOND DESCRIBED

9 IN SUBSECTION (d).—For purposes of this section— 

10 ‘‘(1) IN GENERAL.—The term ‘qualified zone 

11 academy bond described in subsection (d)’means any 

12 bond issued as a part of an issue if—’’. 

13 (B) So much of paragraph (4) of section 

14 1397E(d) of such Code as precedes subpara15 graph (A) is amended to read as follows: 

16 ‘‘(4) QUALIFIED ZONE ACADEMY.—For pur17 poses of this subsection—’’. 

18 (C) Paragraphs (1) and (2) of section 

19 1397E(e) of such Code are each amended by 

20 striking ‘‘national zone academy bond limita21 tion’’ and inserting ‘‘national limitation for 

22 qualified zone academy bonds described in sub23 section (d)’’. 


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1 (D) Section 1397E(i) of such Code is 

2 amended by inserting ‘‘described in subsection 

3 (d)’’ after ‘‘bond’’. 

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

5 this section shall apply to bonds issued after December 

6 31, 2005. 

7 SEC. 7. INCREASED LIMITATION FOR DEDUCTION FOR 

8 HIGHER EDUCATION EXPENSES. 

9 (a) IN GENERAL.—Paragraph (2) of section 222(b) 

10 of the Internal Revenue Code of 1986 (relating to applica11 ble dollar limit) is amended by striking subparagraphs (A) 

12 and (B) and inserting the following: 

13 ‘‘(A) IN GENERAL.—The applicable dollar 

14 limit shall be equal to— 

15 ‘‘(i) in the case of a taxpayer whose 

16 adjusted gross income for the taxable year 

17 does not exceed $65,000 (twice such 

18 amount in the case of a joint return), 

19 $6,000, 

20 ‘‘(ii) in the case of a taxpayer not de21 scribed in clause (i) whose adjusted gross 

22 income for the taxable year does not ex23 ceed $80,000 (twice such amount in the 

24 case of a joint return), $4,000, 


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1 ‘‘(iii) in the case of a taxpayer not de2 scribed in clause (i) or (ii) whose adjusted 

3 gross income for the taxable year does not 

4 exceed $100,000 (twice such amount in the 

5 case of a joint return), $2,000, and 

6 ‘‘(iv) in the case of any other tax7 payer, zero. 

8 ‘‘(B) INFLATION ADJUSTMENT.— 

9 ‘‘(i) LIMITATION AMOUNT.—In the 

10 case of any taxable year beginning after 

11 2006, the $6,000 amount in subparagraph 

12 (A)(i), the $4,000 amount in subparagraph 

13 (A)(ii), and the $2,000 amount in subpara14 graph (A)(iii) shall each be increased by an 

15 amount equal to— 

16 ‘‘(I) such dollar amount, multi17 plied by 

18 ‘‘(II) the cost-of-living adjust19 ment determined under section 1(f)(3) 

20 for the calendar year in which the tax21 able year begins, determined by sub22 stituting ‘calendar year 2005’ for ‘cal23 endar year 1992’ in subparagraph (B) 

24 thereof. 


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1 If any amount as adjusted under the pre2 ceding sentence is not a multiple of $100, 

3 such amount shall be rounded to the next 

4 lowest multiple of $100. 

5 ‘‘(ii) INCOME THRESHOLDS.—In the 

6 case of any taxable year beginning after 

7 2006, the $65,000 amount in subpara8 graph (A)(i), the $80,000 amount in sub9 paragraph (A)(ii), and the $100,000 

10 amount in subparagraph (A)(iii) shall each 

11 be increased by an amount equal to— 

12 ‘‘(I) such dollar amount, multi13 plied by 

14 ‘‘(II) the cost-of-living adjust15 ment determined under section 1(f)(3) 

16 for the calendar year in which the tax17 able year begins, determined by sub18 stituting ‘calendar year 2005’ for ‘cal19 endar year 1992’ in subparagraph (B) 

20 thereof. 

21 If any amount as adjusted under the pre22 ceding sentence is not a multiple of 

23 $1,000, such amount shall be rounded to 

24 the next lowest multiple of $1,000.’’. 


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1 (b) APPLICATION OF EGTRRA SUNSET.—The 

2 amendment made by subsection (a) shall be subject to sec3 tion 901 of the Economic Growth and Tax Relief Rec4 onciliation Act of 2001 to the same extent and in the same 

5 manner as the amendments made by section 431 of such 

6 Act. 

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

8 this section shall apply to taxable years beginning after 

9 December 31, 2005. 

Æ 


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