II 

109TH CONGRESS 

1ST SESSION S. 76 

To amend the Internal Revenue Code of 1986 to permanently increase the 

maximum annual contribution allowed to be made to Coverdell education 

savings accounts, and to provide for a deduction for contributions to 

education savings accounts. 

IN THE SENATE OF THE UNITED STATES 

JANUARY 24, 2005 

Ms. CANTWELL 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 permanently 

increase the maximum annual contribution allowed to 

be made to Coverdell education savings accounts, and 

to provide for a deduction for contributions to education 

savings accounts. 

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 ‘‘The College Savings 

5 Act of 2005’’. 
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1 SEC. 2. INCREASE IN MAXIMUM ANNUAL CONTRIBUTION 

2 FOR COVERDELL EDUCATION SAVINGS AC3 COUNTS. 

4 (a) IN GENERAL.—Section 530(b)(1)(A)(iii) of the 

5 Internal Revenue Code of 1986 (defining Coverdell edu6 cation savings account) is amended by striking ‘‘$2,000’’ 

7 and inserting ‘‘$5,000’’. 

8 (b) CONFORMING AMENDMENT.—Section 

9 4973(e)(1)(A) of the Internal Revenue Code of 1986 is 

10 amended by striking ‘‘$2,000’’ and inserting ‘‘$5,000’’. 

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

12 this section shall apply to taxable years beginning after 

13 December 31, 2004. 

14 SEC. 3. EDUCATION SAVINGS ACCOUNTS. 

15 (a) DEDUCTION FOR CONTRIBUTIONS.—Part VII of 

16 subchapter B of chapter 1 of the Internal Revenue Code 

17 of 1986 (relating to additional itemized deductions for in18 dividuals) is amended by redesignating section 224 as sec19 tion 225 and inserting after section 223 the following new 

20 section: 

21 ‘‘SEC. 224. EDUCATION SAVINGS. 

22 ‘‘(a) DEDUCTION ALLOWED.—In the case of an indi23 vidual, there shall be allowed as a deduction an amount 

24 equal to the amount of contributions made by such indi25 vidual to an education savings account during the taxable 

26 year. 
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1 ‘‘(b) DEFINITIONS.— 

2 ‘‘(1) EDUCATION SAVINGS ACCOUNT.—The 

3 term ‘education savings account’ means a trust cre4 ated or organized in the United States exclusively 

5 for the purpose of paying the qualified education ex6 penses of an individual who is the designated bene7 ficiary of the trust (and designated as an education 

8 savings account at the time created or organized), 

9 but only if the written governing instrument creating 

10 the trust meets the following requirements: 

11 ‘‘(A) No contribution will be accepted— 

12 ‘‘(i) unless it is in cash, 

13 ‘‘(ii) after the date on which such ben14 eficiary attains age 18, or 

15 ‘‘(iii) except in the case of rollover 

16 contributions described in subsection 

17 (e)(4), if such contribution would result in 

18 aggregate contributions for the taxable 

19 year exceeding $5,000. 

20 ‘‘(B) The trustee is a bank (as defined in 

21 section 408(n)) or another person who dem22 onstrates to the satisfaction of the Secretary 

23 that the manner in which that person will ad24 minister the trust will be consistent with the re25 quirements of this section or who has so dem-
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1 onstrated with respect to any individual retire2 ment plan or any Coverdell education savings 

3 account. 

4 ‘‘(C) No part of the trust assets will be in5 vested in life insurance contracts. 

6 ‘‘(D) The assets of the trust shall not be 

7 commingled with other property except in a 

8 common trust fund or common investment 

9 fund. 

10 ‘‘(E) Except as provided in subsection 

11 (e)(6), any balance to the credit of the des12 ignated beneficiary on the date on which the 

13 beneficiary attains age 30 shall be distributed 

14 within 30 days after such date to the bene15 ficiary or, if the beneficiary dies before attain16 ing age 30, shall be distributed within 30 days 

17 after the date of death of such beneficiary. 

18 ‘‘(F) The age limitations in subparagraphs 

19 (A)(ii) and (E), and paragraphs (4) and (5) of 

20 subsection (e), shall not apply to any designated 

21 beneficiary with special needs (as determined 

22 under regulations prescribed by the Secretary). 

23 ‘‘(2) QUALIFIED EDUCATION EXPENSES.—The 

24 term ‘qualified education expenses’ has the meaning 

25 given such term in section 530(b)(2). 
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1 ‘‘(3) CERTAIN RULES TO APPLY.—Rules similar 

2 to the following rules shall apply for purposes of this 

3 section: 

4 ‘‘(A) Section 219(d)(2) (relating to no de5 duction for rollovers), 

6 ‘‘(B) Section 530(b)(5) (relating to time 

7 when contributions deemed made), 

8 ‘‘(C) Section 530(f) (relating to community 

9 property laws), 

10 ‘‘(D) Section 530(g) (relating to custodial 

11 accounts), and 

12 ‘‘(E) Section 530(h) (relating to reports). 

13 ‘‘(c) REDUCTION IN PERMITTED CONTRIBUTION

14 BASED ON ADJUSTED GROSS INCOME.— 

15 ‘‘(1) IN GENERAL.—The maximum amount 

16 which a contributor could otherwise make to an ac17 count under this section shall be reduced by an 

18 amount which bears the same ratio to such max19 imum amount as— 

20 ‘‘(A) the excess of— 

21 ‘‘(i) the contributor’s modified ad22 justed gross income for such taxable year, 

23 over 

24 ‘‘(ii) $95,000 ($190,000 in the case of 

25 a joint return), bears to 
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1 ‘‘(B) $15,000 ($30,000 in the case of a 

2 joint return). 

3 ‘‘(2) MODIFIED ADJUSTED GROSS INCOME.— 

4 For purposes of paragraph (1), the term ‘modified 

5 adjusted gross income’ means the adjusted gross in6 come of the taxpayer for the taxable year increased 

7 by any amount excluded from gross income under 

8 section 911, 931, or 933. 

9 ‘‘(d) TAX TREATMENT OF ACCOUNTS.— 

10 ‘‘(1) IN GENERAL.—An education savings ac11 count is exempt from taxation under this subtitle 

12 unless such account has ceased to be an education 

13 savings account. Notwithstanding the preceding sen14 tence, any such account is subject to the taxes im15 posed by section 511 (relating to imposition of tax 

16 on unrelated business income of charitable, etc. or17 ganizations). 

18 ‘‘(2) ACCOUNT TERMINATIONS.—Rules similar 

19 to the rules of paragraphs (2) and (4) of section 

20 408(e) shall apply to education savings accounts, 

21 and any amount treated as distributed under such 

22 rules shall be treated as not used to pay qualified 

23 education expenses. 

24 ‘‘(e) TREATMENT OF DISTRIBUTIONS.— 
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1 ‘‘(1) IN GENERAL.—Any distribution shall be 

2 includible in the gross income of the distributee in 

3 the manner as provided in section 72. 

4 ‘‘(2) SPECIAL RULES FOR APPLYING ESTATE

5 AND GIFT TAXES WITH RESPECT TO ACCOUNT.— 

6 Rules similar to the rules of paragraphs (2), (4), 

7 and (5) of section 529(c) shall apply for purposes of 

8 this section. 

9 ‘‘(3) ADDITIONAL TAX FOR DISTRIBUTIONS NOT

10 USED FOR EDUCATIONAL EXPENSES.— 

11 ‘‘(A) IN GENERAL.—The tax imposed by 

12 this chapter for any taxable year on any tax13 payer who receives a payment or distribution 

14 from an education savings account which is in 

15 excess of the qualified education expenses of the 

16 designated beneficiary during the taxable year 

17 shall be increased by 10 percent of the amount 

18 of such excess. 

19 ‘‘(B) EXCEPTIONS.—Subparagraph (A) 

20 shall not apply if the payment or distribution 

21 is— 

22 ‘‘(i) made to a beneficiary (or to the 

23 estate of the designated beneficiary) on or 

24 after the death of the designated bene25 ficiary, 
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1 ‘‘(ii) attributable to the designated 

2 beneficiary’s being disabled (within the 

3 meaning of section 72(m)(7)), 

4 ‘‘(iii) made on account of a scholar5 ship, allowance, or payment described in 

6 section 25A(g)(2) received by the account 

7 holder to the extent the amount of the pay8 ment or distribution does not exceed the 

9 amount of the scholarship, allowance, or 

10 payment, or 

11 ‘‘(iv) made on account of the attend12 ance of the designated beneficiary at the 

13 United States Military Academy, the 

14 United States Naval Academy, the United 

15 States Air Force Academy, the United 

16 States Coast Guard Academy, or the 

17 United States Merchant Marine Academy, 

18 to the extent that the amount of the pay19 ment or distribution does not exceed the 

20 costs of advanced education (as defined by 

21 section 2005(e)(3) of title 10, United 

22 States Code, as in effect on the date of the 

23 enactment of this section) attributable to 

24 such attendance. 
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1 ‘‘(C) CONTRIBUTIONS RETURNED BEFORE

2 CERTAIN DATE.—Subparagraph (A) shall not 

3 apply to the distribution of any contribution 

4 made during a taxable year on behalf of the 

5 designated beneficiary if— 

6 ‘‘(i) such distribution is made before 

7 the first day of the sixth month of the tax8 able year following the taxable year, and 

9 ‘‘(ii) such distribution is accompanied 

10 by the amount of net income attributable 

11 to such excess contribution. 

12 Any net income described in clause (ii) shall be 

13 included in gross income for the taxable year in 

14 which such excess contribution was made. 

15 ‘‘(4) ROLLOVER CONTRIBUTIONS.—Paragraph 

16 (1) shall not apply to any amount paid or distrib17 uted from an education savings account to the ex18 tent that the amount received is paid, not later than 

19 the 60th day after the date of such payment or dis20 tribution, into another education savings account for 

21 the benefit of the same beneficiary or a member of 

22 the family (within the meaning of section 529(e)(2)) 

23 of such beneficiary who has not attained age 30 as 

24 of such date. The preceding sentence shall not apply 

25 to any payment or distribution if it applied to any 
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1 prior payment or distribution during the 12-month 

2 period ending on the date of the payment or dis3 tribution. 

4 ‘‘(5) CHANGE IN BENEFICIARY.—Any change in 

5 the beneficiary of an education savings account shall 

6 not be treated as a distribution for purposes of para7 graph (1) if the new beneficiary is a member of the 

8 family (as so defined) of the old beneficiary and has 

9 not attained age 30 as of the date of such change. 

10 ‘‘(6) SPECIAL RULES FOR DEATH AND DI11 VORCE.—Rules similar to the rules of paragraphs 

12 (7) and (8) of section 220(f) shall apply. In applying 

13 the preceding sentence, members of the family (as so 

14 defined) of the designated beneficiary shall be treat15 ed in the same manner as the spouse under such 

16 paragraph (8). 

17 ‘‘(7) DEEMED DISTRIBUTION ON REQUIRED

18 DISTRIBUTION DATE.—In any case in which a dis19 tribution is required under subsection (b)(1)(E), any 

20 balance to the credit of a designated beneficiary as 

21 of the close of the 30-day period referred to in such 

22 subsection for making such distribution shall be 

23 deemed distributed at the close of such period.’’. 

24 (b) TAX ON EXCESS CONTRIBUTIONS.— 
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1 (1) IN GENERAL.—Subsection (a) of section 

2 4973 of the Internal Revenue Code of 1986 (relating 

3 to tax on excess contributions to certain tax-favored 

4 accounts and annuities) is amended by striking ‘‘or’’ 

5 at the end of paragraph (4), by inserting ‘‘or’’ at the 

6 end of paragraph (5), and by inserting after para7 graph (5) the following new paragraph: 

8 ‘‘(6) an education savings account (as defined 

9 in section 224),’’. 

10 (2) EXCESS CONTRIBUTION.—Section 4973 of 

11 such Code is amended by adding at the end the fol12 lowing new subsection: 

13 ‘‘(h) EXCESS CONTRIBUTIONS TO EDUCATION SAV14 INGS ACCOUNTS.—For purposes of this section— 

15 ‘‘(1) IN GENERAL.—In the case of education 

16 savings accounts maintained for the benefit of any 

17 one beneficiary, the term ‘excess contributions’ 

18 means the sum of— 

19 ‘‘(A) the amount by which the amount con20 tributed for the taxable year to such accounts 

21 exceeds $5,000 (or, if less, the sum of the max22 imum amounts permitted to be contributed 

23 under section 224(c) by the contributors to 

24 such accounts for such year); and 
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1 ‘‘(B) the amount determined under this 

2 subsection for the preceding taxable year, re3 duced by the sum of— 

4 ‘‘(i) the distributions out of the ac5 counts for the taxable year (other than dis6 tributions described in section 224(e)(4)); 

7 and 

8 ‘‘(ii) the excess (if any) of the max9 imum amount which may be contributed to 

10 the accounts for the taxable year over the 

11 amount contributed to the accounts for the 

12 taxable year. 

13 ‘‘(2) SPECIAL RULES.—For purposes of para14 graph (1), the following contributions shall not be 

15 taken into account: 

16 ‘‘(A) Any contribution which is distributed 

17 out of the education savings account in a dis18 tribution to which section 224(e)(3)(C) applies. 

19 ‘‘(B) Any rollover contribution.’’. 

20 (c) FAILURE TO PROVIDE REPORTS ON EDUCATION

21 SAVINGS ACCOUNTS.—Paragraph (2) of section 6693(a) 

22 of the Internal Revenue Code of 1986 (relating to failure 

23 to provide reports on individual retirement accounts or an24 nuities) is amended by striking ‘‘and’’ at the end of sub25 paragraph (D), by striking the period at the end of sub-
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1 paragraph (E) and inserting ‘‘, and’’, and by adding at 

2 the end the following new subparagraph: 

3 ‘‘(F) section 224(b)(3)(E) (relating to edu4 cation savings accounts).’’. 

5 (d) CLERICAL AMENDMENT.—The table of section 

6 for part VII of subchapter B of chapter 1 of the Internal 

7 Revenue Code of 1986 is amended by striking the item 

8 relating to section 224 and inserting the following new 

9 items: 

‘‘Sec. 224. Education savings. 

‘‘Sec. 225. Cross reference.’’. 

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

11 this section shall apply to contributions made in taxable 

12 years beginning after December 31, 2004. 

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