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amount of qualified higher education expenses paid by the
taxpayer during the taxable year.
‘‘(b) LIMITATIONS.—
‘‘(1) DOLLAR LIMITATION.—
‘‘(A) IN GENERAL.—The amount allowed
as a deduction under subparagraph (a) for any
taxable year shall not exceed $10,000.
‘‘(B) PHASE-IN.—In the case of taxable
years beginning in 1996, 1997, or 1998,
‘$5,000’ shall be substituted for ‘$10,000’ in
subparagraph (A).
‘‘(2) LIMITATION
BASED
ON
MODIFIED
AD-
JUSTED GROSS INCOME.—
‘‘(A) IN
GENERAL.—The amount which
would (but for this paragraph) be taken into ac-
count under paragraph (1) shall be reduced
(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—
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‘‘(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—
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‘‘(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
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‘‘(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
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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
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‘‘(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.
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‘‘(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,
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‘‘(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-
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tions requiring recordkeeping and information re-
porting.
‘‘(e) TERMINATION.—This section shall not apply to
taxable years beginning after December 31, 2000.’’
(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.
Subtitle B—Provisions Relating To
Individual Retirement Plans
PART I—RETIREMENT SAVINGS INCENTIVES
Subpart A—IRA Deduction
SEC. ll11. 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
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(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, and before January 1, 2001.
SEC. ll12. 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
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‘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-
justed under paragraph (1) is not a multiple of
$500, such amount shall be rounded to the next
lowest multiple of $500.
‘‘(B) APPLICABLE DOLLAR AMOUNTS.—If
any amount referred to in paragraph (2)(B) as
adjusted under paragraph (1) is not a multiple
of $5,000, such amount shall be rounded to the
next lowest multiple of $5,000.’’
(b) CONFORMING AMENDMENTS.—
(1) Clause (i) of section 219(c)(2)(A) is amend-
ed to read as follows:
‘‘(i) the sum of $250 and the dollar
amount in effect for the taxable year under
subsection (b)(1)(A), or’’.
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(2) Section 408(a)(1) is amended by striking
‘‘in excess of $2,000 on behalf of any individual’’
and inserting ‘‘on behalf of any individual in excess
of the amount in effect for such taxable year under
section 219(b)(1)(A)’’.
(3) Section 408(b)(2)(B) is amended by strik-
ing ‘‘$2,000’’ and inserting ‘‘the dollar amount in
effect under section 219(b)(1)(A)’’.
(4) Subparagraph (A) of section 408(d)(5) is
amended by striking ‘‘$2,250’’ and inserting ‘‘the
dollar amount in effect for the taxable year under
section 219(c)(2)(A)(i)’’.
(5) Section 408(j) is amended by striking
‘‘$2,000’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995, and before January 1, 2001.
SEC. ll13. COORDINATION OF IRA DEDUCTION LIMIT
WITH ELECTIVE DEFERRAL LIMIT.
(a) IN GENERAL.—Section 219(b) (relating to maxi-
mum amount of deduction) is amended by adding at the
end the following new paragraph:
‘‘(4) COORDINATION
WITH
ELECTIVE
DEFER-
RAL LIMIT.—The amount determined under para-
graph (1) or subsection (c)(2) with respect to any
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individual for any taxable year shall not exceed the
excess (if any) of—
‘‘(A) the limitation applicable for the tax-
able year under section 402(g)(1), over
‘‘(B) the elective deferrals (as defined in
section 402(g)(3)) of such individual for such
taxable year.’’
(b) CONFORMING AMENDMENT.—Section 219(c) is
amended by adding at the end the following new para-
graph:
‘‘(3) CROSS REFERENCE.—
‘‘For reduction in paragraph (2) amount, see
subsection (b)(4).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995, and before January 1, 2001.
Subpart B—Nondeductible Tax-Free IRA’s
SEC. ll21. ESTABLISHMENT OF NONDEDUCTIBLE TAX-
FREE INDIVIDUAL RETIREMENT ACCOUNTS.
(a) IN GENERAL.—Subpart A of part I of subchapter
D of chapter 1 (relating to pension, profit-sharing, stock
bonus plans, etc.) is amended by inserting after section
408 the following new section:
‘‘SEC. 408A. SPECIAL INDIVIDUAL RETIREMENT ACCOUNTS.
‘‘(a) GENERAL RULE.—Except as provided in this
chapter, a special individual retirement account shall be
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treated for purposes of this title in the same manner as
an individual retirement plan.
‘‘(b) 
SPECIAL
INDIVIDUAL
RETIREMENT
AC-
COUNT.—For purposes of this title, the term ‘special indi-
vidual retirement account’ means an individual retirement
plan which is designated at the time of establishment of
the plan as a special individual retirement account.
‘‘(c) TREATMENT OF CONTRIBUTIONS.—
‘‘(1) NO DEDUCTION ALLOWED.—No deduction
shall be allowed under section 219 for a contribution
to a special individual retirement account.
‘‘(2) CONTRIBUTION
LIMIT.—The aggregate
amount of contributions for any taxable year to all
special individual retirement accounts maintained for
the benefit of an individual shall not exceed the ex-
cess (if any) of—
‘‘(A) the maximum amount allowable as a
deduction under section 219 with respect to
such individual for such taxable year, over
‘‘(B) the amount so allowed.
‘‘(3) SPECIAL RULES FOR QUALIFIED TRANS-
FERS.—
‘‘(A) IN GENERAL.—No rollover contribu-
tion may be made to a special individual retire-
ment account unless it is a qualified transfer.
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‘‘(B) LIMIT NOT TO APPLY.—The limita-
tion under paragraph (2) shall not apply to a
qualified transfer to a special individual retire-
ment account.
‘‘(d) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) IN GENERAL.—Except as provided in this
subsection, any amount paid or distributed out of a
special individual retirement account shall not be in-
cluded in the gross income of the distributee.
‘‘(2) EXCEPTION FOR EARNINGS ON CONTRIBU-
TIONS HELD LESS THAN 5 YEARS.—
‘‘(A) IN GENERAL.—Any amount distrib-
uted out of a special individual retirement ac-
count which consists of earnings allocable to
contributions made to the account during the 5-
year period ending on the day before such dis-
tribution shall be included in the gross income
of the distributee for the taxable year in which
the distribution occurs.
‘‘(B) ORDERING RULE.—
‘‘(i) FIRST-IN, FIRST-OUT
RULE.—
Distributions from a special individual re-
tirement account shall be treated as having
been made—
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‘‘(I) first from the earliest con-
tribution 
(and 
earnings 
allocable
thereto) remaining in the account at
the time of the distribution, and
‘‘(II) then from other contribu-
tions (and earnings allocable thereto)
in the order in which made.
‘‘(ii) ALLOCATIONS
BETWEEN
CON-
TRIBUTIONS AND EARNINGS.—Any portion
of a distribution allocated to a contribution
(and earnings allocable thereto) shall be
treated as allocated first to the earnings
and then to the contribution.
‘‘(iii) ALLOCATION
OF
EARNINGS.—
Earnings shall be allocated to a contribu-
tion in such manner as the Secretary may
by regulations prescribe.
‘‘(iv) 
CONTRIBUTIONS
IN
SAME
YEAR.—Except as provided in regulations,
all contributions made during the same
taxable year may be treated as 1 contribu-
tion for purposes of this subparagraph.
‘‘(C) CROSS REFERENCE.—
‘‘For additional tax for early withdrawal, see
section 72(t).
‘‘(3) QUALIFIED TRANSFER.—
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‘‘(A) IN
GENERAL.—Paragraph (2) shall
not apply to any distribution which is trans-
ferred in a qualified transfer to another special
individual retirement account.
‘‘(B) CONTRIBUTION
PERIOD.—For pur-
poses of paragraph (2), the special individual
retirement account to which any contributions
are transferred shall be treated as having held
such contributions during any period such con-
tributions were held (or are treated as held
under this subparagraph) by the special individ-
ual retirement account from which transferred.
‘‘(4) SPECIAL
RULES
RELATING
TO
CERTAIN
TRANSFERS.—
‘‘(A) IN GENERAL.—Notwithstanding any
other provision of law, in the case of a qualified
transfer to a special individual retirement ac-
count from an individual retirement plan which
is not a special individual retirement account—
‘‘(i) there shall be included in gross
income any amount which, but for the
qualified transfer, would be includible in
gross income, but
‘‘(ii) section 72(t) shall not apply to
such amount.
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This paragraph shall not apply to a transfer from a
special individual retirement account to another spe-
cial individual retirement account.
‘‘(3) DEFINITIONS.—For purposes of this sub-
section, the terms ‘adjusted gross income’ and ‘ap-
plicable dollar amount’ have the meanings given
such terms by section 219(g)(3), except subpara-
graph (A)(ii) thereof shall be applied without regard
to the phrase ‘or the deduction allowable under this
section’.’’
(b) EARLY WITHDRAWAL PENALTY.—Section 72(t)
is amended by adding at the end the following new para-
graph:
‘‘(6) RULES RELATING TO SPECIAL INDIVIDUAL
RETIREMENT ACCOUNTS.—In the case of a special
individual retirement account under section 408A—
‘‘(A) this subsection shall only apply to
distributions out of such account which consist
of earnings allocable to contributions made to
the account during the 5-year period ending on
the day before such distribution, and
‘‘(B) paragraph (2)(A)(i) shall not apply to
any distribution described in subparagraph
(A).’’
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(c) EXCESS CONTRIBUTIONS.—Section 4973(b) is
amended by adding at the end the following new sentence:
‘‘For purposes of paragraphs (1)(B) and (2)(C), the
amount allowable as a deduction under section 219 shall
be computed without regard to section 408A.’’
(d) CONFORMING AMENDMENT.—The table of sec-
tions for subpart A of part I of subchapter D of chapter
1 is amended by inserting after the item relating to section
408 the following new item:
‘‘Sec. 408A. Special individual retirement accounts.’’
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995, and before January 1, 2001.
PART II—PENALTY-FREE DISTRIBUTIONS
SEC. ll21. 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:
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‘‘(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-
cation expenses (as defined in paragraph
(8)) of the taxpayer for the taxable year.’’
(b) FINANCIALLY
DEVASTATING
MEDICAL
EX-
PENSES.—
(1) 
IN
GENERAL.—Section 
72(t)(3)(A) 
is
amended by striking ‘‘(B),’’.
(2) CERTAIN LINEAL DESCENDANTS AND AN-
CESTORS
TREATED
AS
DEPENDENTS
AND
LONG-
TERM
CARE
SERVICES
TREATED
AS
MEDICAL
CARE.—Subparagraph (B) of section 72(t)(2) is
amended by striking ‘‘medical care’’ and all that fol-
lows and inserting ‘‘medical care determined—
‘‘(i) without regard to whether the
employee itemizes deductions for such tax-
able year, and
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‘‘(ii) in the case of an individual re-
tirement plan—
‘‘(I) by treating such employee’s
dependents as including all children,
grandchildren and ancestors of the
employee or such employee’s spouse
and
‘‘(II) by treating qualified long-
term care services (as defined in para-
graph (9)) as medical care for pur-
poses of this subparagraph (B).’’
(3) CONFORMING AMENDMENT.—Subparagraph
(B) of section 72(t)(2) is amended by striking ‘‘or
(C)’’ and inserting ‘‘, (C) or (D)’’.
(c) DEFINITIONS.—Section 72(t), as amended by this
Act, is amended by adding at the end the following new
paragraphs:
‘‘(7) QUALIFIED FIRST-TIME HOMEBUYER DIS-
TRIBUTIONS.—For 
purposes 
of 
paragraph
(2)(D)(i)—
‘‘(A) IN
GENERAL.—The term ‘qualified
first-time homebuyer distribution’ means any
payment or distribution received by an individ-
ual to the extent such payment or distribution
is used by the individual before the close of the
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60th day after the day on which such payment
or distribution is received to pay qualified ac-
quisition costs with respect to a principal resi-
dence of a first-time homebuyer who is such in-
dividual or the spouse, child (as defined in sec-
tion 151(c)(3)), or grandchild of such individ-
ual.
‘‘(B) QUALIFIED
ACQUISITION
COSTS.—
For purposes of this paragraph, the term
‘qualified acquisition costs’ means the costs of
acquiring, constructing, or reconstructing a res-
idence. Such term includes any usual or reason-
able settlement, financing, or other closing
costs.
‘‘(C) FIRST-TIME
HOMEBUYER; 
OTHER
DEFINITIONS.—For purposes of this para-
graph—
‘‘(i) FIRST-TIME
HOMEBUYER.—The
term ‘first-time homebuyer’ means any in-
dividual if—
‘‘(I) such individual (and if mar-
ried, such individual’s spouse) had no
present ownership interest in a prin-
cipal residence during the 3-year pe-
riod ending on the date of acquisition
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of the principal residence to which
this paragraph applies, and
‘‘(II) subsection (h) or (k) of sec-
tion 1034 did not suspend the run-
ning of any period of time specified in
section 1034 with respect to such in-
dividual on the day before the date
the distribution is applied pursuant to
subparagraph (A).
In the case of an individual described in
section 143(i)(1)(C) for any year, an own-
ership interest shall not include any inter-
est under a contract of deed described in
such section. An individual who loses an
ownership interest in a principal residence
incident to a divorce or legal separation is
deemed for purposes of this subparagraph
to have had no ownership interest in such
principal residence within the period re-
ferred to in subclause (II).
‘‘(ii) 
PRINCIPAL
RESIDENCE.—The
term ‘principal residence’ has the same
meaning as when used in section 1034.
‘‘(iii) DATE
OF
ACQUISITION.—The
term ‘date of acquisition’ means the date—