I
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 bene-
fits to individuals who save for, or pay for, higher edu-
cation.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Family Affordable Col-
lege 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 (re-
lating 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 in-
come of the taxpayer for the taxable year deter-
mined—
‘‘(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 subpara-
graph (B), adjusted gross income shall be deter-
mined without regard to the deduction allowed under
this section.
‘‘(4) INFLATION ADJUSTMENTS.—
‘‘(A) IN GENERAL.—In the case of a tax-
able 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 de-
termined under section 1(f)(3) for the cal-
endar year in which the taxable year be-
gins, determined by substituting ‘calendar
year 1998’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof.
‘‘(B) ROUNDING.—If any amount as ad-
justed 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
EX-
PENSES.—
‘‘(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 tax-
payer with respect to whom the tax-
payer is allowed a deduction under
section 151, or
‘‘(IV) any grandchild of the tax-
payer,
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 ex-
penses—
‘‘(i) are attributable to courses of in-
struction 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 grad-
uate 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 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) is carrying at least one-half the
normal full-time work load for the course
of study the student is pursuing, as deter-
mined by the institution of higher edu-
cation.
‘‘(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 sub-
division 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 edu-
cation (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 deter-
mined 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 tax-
payer 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 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 qualified high-
er education expenses for any taxable year only
to the extent such expenses are in connection
with enrollment at an institution of higher edu-
cation 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
SCHOLAR-
SHIPS AND VETERANS BENEFITS.—The amount of
qualified higher education expenses otherwise taken
into account under subsection (a) or (d)(2) with re-
spect to the education of an individual shall be re-
duced (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) 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 sec-
tions 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 chap-
ter 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 insert-
ing after section 221 the following new section:
‘‘SEC. 222. EDUCATION SAVINGS PLANS.
‘‘(a) DEDUCTION ALLOWED.—In the case of an indi-
vidual, 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 edu-
cation 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
AD-
JUSTED
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 in-
come of the taxpayer for the taxable year deter-
mined—
‘‘(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 subpara-
graph (B), adjusted gross income shall be deter-
mined without regard to the deduction allowed under
this section.
‘‘(3) PLAN
MAY
NOT
BE
ESTABLISHED
FOR
BENEFIT OF MORE THAN 1 INDIVIDUAL.—An edu-
cation savings plan may not be established for the
benefit of more than 1 individual.
‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur-
poses 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 de-
duction under section 151, or
‘‘(D) any grandchild of the taxpayer.
‘‘(2) EDUCATION
SAVINGS
PLAN.—The term
‘education savings plan’ means a trust created or or-
ganized in the United States exclusively for the pur-
pose of paying the qualified higher education ex-
penses of an eligible individual, but only if the writ-
ten governing instrument creating the trust meets
the following requirements:
‘‘(A) No contribution will be accepted un-
less 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 dem-
onstrates to the satisfaction of the Secretary
that the manner in which that person will ad-
minister the trust will be consistent with the re-
quirements of this section.
‘‘(C) No part of the trust assets will be in-
vested 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
ment 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 de-
fined in section 221).
‘‘(3) DISTRIBUTIONS TO ANOTHER PLAN OR TO
INSTITUTION
OF
HIGHER
EDUCATION.—Paragraph
(1) shall not apply to any distribution under sub-
section (c)(2)(E)(ii).
‘‘(4) EXCESS CONTRIBUTIONS RETURNED BE-
FORE 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 be-
fore the day prescribed by law (including exten-
sions of time) for filing such individual’s return
for such taxable year,
‘‘(B) no deduction is allowed under sub-
section (a) with respect to such excess contribu-
tion, 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 sub-
title unless such plan has ceased to be an education
savings plan by reason of paragraph (3). Notwith-
standing 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 ELIGI-
BILITY
FOR
OTHER
FEDERAL
ASSISTANCE.—
Amounts held in any education savings plan shall
not be taken into account in determining the eligi-
bility for, or the amount of, any grant under any
Federal student assistance program.
‘‘(3) LOSS OF EXEMPTION OF PLAN WHERE IN-
DIVIDUAL
ENGAGES
IN
PROHIBITED
TRANS-
ACTION.—
‘‘(A) IN GENERAL.—If the individual for
whose benefit an education savings plan is es-
tablished 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) dur-
ing 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
SECU-
RITY.—If, during any taxable year, the individual for
whose benefit an education savings plan is estab-
lished, 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 IN-
CLUDED 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 in-
come 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 in-
creased 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.—Para-
graphs (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 sec-
tion, a custodial plan shall be treated as a trust if the
assets of such plan are held by a bank (as defined in sec-
tion 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 re-
quirements 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 treat-
ed as a trust by reason of the preceding sentence, the cus-
todian 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 fur-
nished to such individuals at such time and in such man-
ner as may be required by those regulations.’’
(b) DEDUCTION ALLOWED
IN ARRIVING
AT AD-
JUSTED GROSS INCOME.—Paragraph (7) of section 62(a)
of such Code (relating to retirement savings) is amend-
ed—
(1) by inserting ‘‘OR EDUCATION’’ after ‘‘RE-
TIREMENT’’ 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) con-
tracts, 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 sub-
section (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 sub-
section:
‘‘(e) EXCESS CONTRIBUTIONS TO EDUCATION SAV-
INGS PLANS.—For purposes of this section, in the case
of an education savings plan, the term ‘excess contribu-
tions’ means the amount by which the amount contributed
for the taxable year to the plan exceeds the amount allow-
able 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 sub-
section:
‘‘(h) EDUCATION SAVINGS PLANS.—Any contribution
made by an individual to an education savings plan de-
scribed in section 222(c)(2) which is allowable as a deduc-
tion 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 pro-
hibited 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 edu-
cation savings plan is established and any contribu-
tor to such plan shall be exempt from the tax im-
posed by this section with respect to any transaction
concerning such plan (which would otherwise be tax-
able under this section) if, with respect to such
transaction, the plan ceases to be an education sav-
ings plan by reason of the application of section
222(e)(2)(A) to such plan.’’
(2) Paragraph (1) of section 4975(e) is amend-
ed 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 indi-
vidual 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 para-
graph:
‘‘(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 dis-
tribution is excluded from gross income of such indi-
vidual under section 222(d)(2).’’
(h) CLERICAL AMENDMENTS.—
(1) The table of sections for part VII of sub-
chapter B of chapter 1 of such Code is amended by
striking the item relating to section 222 and insert-
ing 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 sec-
tion 4973 and inserting the following new item:
‘‘Sec. 4973. Tax on excess contributions to individual retirement
accounts, medical savings accounts, education sav-
ings plans, certain 403(b) contracts, and certain in-
dividual 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 fol-
lowing 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.
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