I
104TH CONGRESS
1ST SESSION
H. R. 980
To amend the Internal Revenue Code of 1986 to provide tax relief for
the middle class.
IN THE HOUSE OF REPRESENTATIVES
FEBRUARY 16, 1995
Mr. GEPHARDT (for himself and Mr. GIBBONS) (both by request) 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 provide
tax relief for the middle class.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Middle-Class Bill of Rights Tax Relief Act of 1995’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
(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 ac-
counts.
Subtitle B—Penalty-Free Distributions
Sec. 221. Distributions from certain plans may be used without penalty to pur-
chase first homes, to pay higher education or financially dev-
astating medical expenses, or by the unemployed.
Sec. 222. Contributions must be held at least 5 years in certain cases.
TITLE I—MIDDLE CLASS TAX
RELIEF
SEC. 101. CREDIT FOR FAMILIES WITH YOUNG CHILDREN.
(a) IN GENERAL.—Subpart A of part IV of sub-
chapter A of chapter 1 (relating to nonrefundable personal
credits) is amended by inserting after section 22 the fol-
lowing new section:
‘‘SEC. 23. FAMILIES WITH YOUNG CHILDREN.
‘‘(a) ALLOWANCE OF CREDIT.—
‘‘(1) IN GENERAL.—In the case of an individ-
ual, there shall be allowed as a credit against the tax
imposed by this chapter for the taxable year an
amount equal to $300 multiplied by the number of
eligible children of the taxpayer for the taxable year.
‘‘(2) INCREASE IN CREDIT.—In the case of tax-
able years beginning after December 31, 1998, para-
graph (1) shall be applied by substituting ‘$500’ for
‘$300’.
‘‘(b) LIMITATIONS.—
‘‘(1) PHASE-OUT OF CREDIT.—
‘‘(A) IN
GENERAL.—The amount of the
credit allowed under subsection (a) shall be re-
duced (but not below zero) by the amount de-
termined under subparagraph (B).
‘‘(B) 
AMOUNT
OF
REDUCTION.—The
amount determined under this subparagraph
equals the amount which bears the same ratio
to the credit (determined without regard to this
subsection) as—
‘‘(i) the excess of—
‘‘(I) 
the 
taxpayer’s 
adjusted
gross income for such taxable year,
over
‘‘(II) $60,000, bears to
‘‘(ii) $15,000.
Any amount determined under this subpara-
graph which is not a multiple of $10 shall be
rounded to the next lowest $10.
‘‘(C) ADJUSTED GROSS INCOME.—For pur-
poses of this paragraph, adjusted gross income
of any taxpayer shall be increased by any
amount excluded from gross income under sec-
tion 911, 931, or 933.
‘‘(2) LIMITATION
BASED
ON
AMOUNT
OF
TAX.—The credit allowed by subsection (a) for the
taxable year (after the application of paragraph (1))
shall not exceed the excess (if any) of—
‘‘(A) the taxpayer’s regular tax liability for
the taxable year reduced by the credits allow-
able against such tax under this subpart (other
than this section) determined without regard to
section 26, over
‘‘(B) the sum of—
‘‘(i) the taxpayer’s tentative minimum
tax for such taxable year, plus
‘‘(ii) the credit allowed for the taxable
year under section 32.
(but not below zero) by the amount determined
under subparagraph (B).
‘‘(B) 
AMOUNT
OF
REDUCTION.—The
amount determined under this subparagraph
equals the amount which bears the same ratio
to the amount which would be so taken into ac-
count as—
‘‘(i) the excess of—
‘‘(I) the taxpayer’s modified ad-
justed gross income for such taxable
year, over
‘‘(II) $70,000 ($100,000 in the
case of a joint return), bears to
‘‘(ii) $20,000.
‘‘(C) MODIFIED
ADJUSTED
GROSS
IN-
COME.—The term ‘modified adjusted gross in-
come’ means the adjusted gross income of the
taxpayer for the taxable year determined—
‘‘(i) without regard to this section and
sections 911, 931, and 933, and
‘‘(ii) after the application of sections
86, 135, 219 and 469.
For purposes of sections 86, 135, 219, and
469, adjusted gross income shall be determined
without regard to the deduction allowed under
this section.
‘‘(D) INFLATION ADJUSTMENTS.—
‘‘(i) IN GENERAL.—In the case of a
taxable year beginning after 1999, the
$70,000 and $100,000 amounts described
in subparagraph (B) shall each be in-
creased by an amount equal to—
‘‘(I) such dollar amounts, multi-
plied by
‘‘(II) the cost-of-living adjust-
ment determined under section 1(f)(3)
for the calendar year in which the tax-
able year begins, determined by sub-
stituting ‘calendar year 1998’ for ‘cal-
endar year 1992’ in subparagraph (B)
thereof.
‘‘(ii) ROUNDING.—If any amount as
adjusted under clause (i) 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
EX-
PENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ means tuition and
fees charged by an educational institution and
required for the enrollment or attendance of—
‘‘(i) the taxpayer,
‘‘(ii) the taxpayer’s spouse, or
‘‘(iii) any dependent of the taxpayer
with respect to whom the taxpayer is al-
lowed a deduction under section 151,
as an eligible student at an institution of higher
education.
‘‘(B) EXCEPTION FOR EDUCATION INVOLV-
ING SPORTS, ETC.—Such term does not include
expenses with respect to any course or other
education involving sports, games, or hobbies,
unless such expenses—
‘‘(i) are part of a degree program, or
‘‘(ii) are deductible under this chapter
without regard to this section.
‘‘(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 aca-
demic 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 sec-
tion, and
‘‘(ii)(I) 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, or
‘‘(II) is enrolled in a course which en-
ables the student to improve the student’s
job skills or to acquire new job skills.
‘‘(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) SPECIAL RULES.—
‘‘(1) NO DOUBLE BENEFIT.—
‘‘(A) IN GENERAL.—No deduction shall be
allowed under subsection (a) for qualified high-
er education expenses with respect to which a
deduction is allowable to the taxpayer under
any other provision of this chapter unless the
taxpayer irrevocably waives his right to the de-
duction of such expenses under such other pro-
vision.
‘‘(B) DEPENDENTS.—No deduction shall
be allowed under subsection (a) to any individ-
ual 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 de-
duction 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 DE-
DUCTION.—
‘‘(A) IN GENERAL.—A deduction shall be
allowed under subsection (a) for any taxable
year only to the extent the qualified higher edu-
cation expenses are in connection with enroll-
ment at an institution of higher education dur-
ing 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 1st 3 months of the next
taxable year.
‘‘(3) ADJUSTMENT
FOR
CERTAIN
SCHOLAR-
SHIPS AND VETERANS BENEFITS.—The amount of
qualified higher education expenses otherwise taken
into account under subsection (a) 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, be-
quest, devise, or inheritance within the meaning
of section 102(a)) for educational expenses, or
attributable to enrollment at an eligible edu-
cational institution, which is exempt from in-
come taxation by any law of the United States.
‘‘(4) NO
DEDUCTION
FOR
MARRIED
INDIVID-
UALS FILING SEPARATE RETURNS.—If the taxpayer
is a married individual (within the meaning of sec-
tion 7703), this section shall apply only if the tax-
payer 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 in-
dividual 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 pre-
scribe such regulations as may be necessary or ap-
propriate to carry out this section, including regula-
tions requiring recordkeeping and information re-
porting.’’
(b) DEDUCTION
ALLOWED
IN
COMPUTING
AD-
JUSTED GROSS INCOME.—Section 62(a) is amended by in-
serting after paragraph (15) the following new paragraph:
‘‘(16) 
HIGHER
EDUCATION
TUITION
AND
FEES.—The deduction allowed by section 220.’’
(c) CONFORMING AMENDMENT.—The table of sec-
tions for part VII of subchapter B of chapter 1 is amended
by striking the item relating to section 220 and inserting:
‘‘Sec. 220. Higher education tuition and fees.
‘‘Sec. 221. Cross reference.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to payments made after December
31, 1995.
TITLE 
II—PROVISIONS 
RELAT-
ING TO INDIVIDUAL RETIRE-
MENT PLANS
Subtitle A—Retirement Savings
Incentives
PART I—IRA DEDUCTION
SEC. 201. INCREASE IN INCOME LIMITATIONS.
(a) IN GENERAL.—Subparagraph (B) of section
219(g)(3) is amended—
(1) by striking ‘‘$40,000’’ in clause (i) and in-
serting ‘‘$80,000’’, and
(2) by striking ‘‘$25,000’’ in clause (ii) and in-
serting ‘‘$50,000’’.
(b) PHASE-OUT OF LIMITATIONS.—Clause (ii) of sec-
tion 219(g)(2)(A) is amended by striking ‘‘$10,000’’ and
inserting ‘‘an amount equal to 10 times the dollar amount
applicable for the taxable year under subsection
(b)(1)(A)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
SEC. 202. INFLATION ADJUSTMENT FOR DEDUCTIBLE
AMOUNT AND INCOME LIMITATIONS.
(a) IN GENERAL.—Section 219 is amended by redes-
ignating subsection (h) as subsection (i) and by inserting
after subsection (g) the following new subsection:
‘‘(h) COST-OF-LIVING ADJUSTMENTS.—
‘‘(1) IN GENERAL.—In the case of any taxable
year beginning in a calendar year after 1996, each
dollar amount to which this subsection applies shall
be increased by an amount equal to—
‘‘(A) such dollar amount, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar
year in which the taxable year begins, deter-
mined by substituting ‘calendar year 1995’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
‘‘(2) DOLLAR AMOUNTS TO WHICH SUBSECTION
APPLIES.—This subsection shall apply to—
‘‘(A) the $2,000 amounts under subsection
(b)(1)(A) and (c), and
‘‘(B) the applicable dollar amounts under
subsection (g)(3)(B).
‘‘(3) ROUNDING RULES.—
‘‘(A) 
DEDUCTION
AMOUNTS.—If 
any
amount referred to in paragraph (2)(A) as ad-
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
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 EX-
PENSES, OR BY THE UNEMPLOYED.
(a) IN GENERAL.—Paragraph (2) of section 72(t)
(relating to exceptions to 10-percent additional tax on
early distributions from qualified retirement plans) is
amended by adding at the end the following new subpara-
graph:
‘‘(D) 
DISTRIBUTIONS
FROM
CERTAIN
PLANS FOR FIRST HOME PURCHASES OR EDU-
CATIONAL EXPENSES.—Distributions to an in-
dividual from an individual retirement plan—
‘‘(i) which are qualified first-time
homebuyer distributions (as defined in
paragraph (7)); or
‘‘(ii) to the extent such distributions
do not exceed the qualified higher edu-