I
105TH CONGRESS
1ST SESSION
H. R. 1694
To amend the Internal Revenue Code of 1986 to allow individuals a credit
against income tax for certain amounts contributed to an education
investment account.
IN THE HOUSE OF REPRESENTATIVES
MAY 21, 1997
Mrs. JOHNSON of Connecticut 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 allow indi-
viduals a credit against income tax for certain amounts
contributed to an education investment account.
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
‘‘Higher Education Savings Credit Act of 1997’’.
(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.
SEC. 2. CREDIT FOR CONTRIBUTIONS TO EDUCATION IN-
VESTMENT ACCOUNTS.
(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 23 the fol-
lowing new section:
‘‘SEC. 24. CONTRIBUTIONS TO EDUCATION INVESTMENT AC-
COUNTS.
‘‘(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 the applicable percentage of the
contributions made by the taxpayer for the taxable
year to an education investment account of an ac-
count holder who is an individual with respect to
whom the taxpayer is allowed a deduction under sec-
tion 151(c) for such taxable year.
‘‘(2) APPLICABLE PERCENTAGE.—For purposes
of paragraph (1), the applicable percentage is the
percentage determined in accordance with the follow-
ing table with respect to the age of the account hold-
er as of the close of the taxable year:
‘‘If the account
The applicable
holder’s age is:
percentage is:
Not over 6 ...........................................................................
Over 6 but not over 9 .........................................................
Over 9 but not over 12 .......................................................
Over 12 but not over 15 .....................................................
Over 15 but not over 18 .....................................................
‘‘(b) LIMITATION ON AMOUNT OF CONTRIBUTIONS
TAKEN INTO ACCOUNT IN DETERMINING CREDIT.—The
amount of contributions which may be taken into account
under subsection (a) with respect to each account holder
shall not exceed $500.
‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) EDUCATION INVESTMENT ACCOUNT.—The
term ‘education investment account’ means a trust
created or organized in the United States exclusively
for the purpose of paying the qualified higher edu-
cation expenses of the account holder, but only if the
written governing instrument creating the trust
meets the following requirements:
‘‘(A) No contribution will be accepted—
‘‘(i) unless it is in cash,
‘‘(ii) except in the case of rollover con-
tributions from another education invest-
ment account, in excess of $1,500 for any
calendar year, and
‘‘(iii) after the date on which the ac-
count holder attains age 18.
‘‘(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.
‘‘(E) Any balance in the education invest-
ment account on the day after the date on
which the account holder attains age 30 (or, if
earlier, the date on which such holder dies)
shall be distributed within 30 days of such date
to the account holder (or in the case of death,
the beneficiary).
‘‘(2) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ means the cost of
attendance (within the meaning of section 472
of the Higher Education Act of 1965 (20
U.S.C. 1087ll), as in effect on the date of the
enactment of the Higher Education Access and
Affordability Act of 1997) of the account holder
at an eligible educational institution, except
that such expenses shall be reduced by—
‘‘(i) the amount excluded from gross
income under section 135 by reason of
such expenses, and
‘‘(ii) the amount of the reduction de-
scribed in section 135(d)(1) (other than
subparagraph (E)).
‘‘(B) STATE TUITION PLANS.—Such term
shall include amounts paid or incurred to pur-
chase tuition credits or certificates, or to make
contributions to an account, under a qualified
State tuition program (as defined in section
529(b)).
‘‘(3) ELIGIBLE EDUCATIONAL INSTITUTION.—
The term ‘eligible educational institution’ has the
meaning given such term by section 135(c)(3).
‘‘(4) ACCOUNT
HOLDER.—The term ‘account
holder’ means the individual for whose benefit the
education investment account is established.
‘‘(5) TIME
WHEN
CONTRIBUTIONS
DEEMED
MADE.—A taxpayer shall be deemed to have made a
contribution on the last day of the preceding taxable
year if the contribution is made on account of such
taxable year and is made not later than the time
prescribed by law for filing the return for such tax-
able year (not including extensions thereof).
‘‘(6) ACCOUNT MAY NOT BE ESTABLISHED FOR
BENEFIT OF MORE THAN 1 INDIVIDUAL.—An edu-
cation investment account may not be established for
the benefit of more than 1 individual.
‘‘(7) SPECIAL RULE WHERE MORE THAN 1 AC-
COUNT.—If, at any time during a calendar year, 2
or more education investment accounts are main-
tained for the benefit of an individual, only the ac-
count first established shall be treated as an edu-
cation investment account for purposes of this sec-
tion. This paragraph shall not apply to the extent
more than 1 account exists solely by reason of a roll-
over contribution.
‘‘(d) TAX TREATMENT OF ACCOUNT.—
‘‘(1) IN
GENERAL.—An education investment
account shall be exempt from taxation under this
subtitle. Notwithstanding the preceding sentence,
the education investment account shall be subject to
the taxes imposed by section 511 (relating to imposi-
tion of tax on unrelated business income of chari-
table organizations).
‘‘(2) SPECIAL
RULES.—Rules similar to the
rules of paragraphs (2) and (4) of section 408(e)
shall apply to any education investment account, and
any amount treated as distributed under such rules
shall be treated as not used to pay qualified higher
education expenses.
‘‘(e) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, any amount paid or distrib-
uted out of an education investment account shall be
included in gross income of the payee or distributee
for the taxable year in the manner prescribed by sec-
tion 72. For purposes of the preceding sentence,
rules similar to the rules of section 408(d)(2) shall
apply.
‘‘(2) DISTRIBUTION
USED
TO
PAY
EDU-
CATIONAL
EXPENSES.—Paragraph (1) shall not
apply to any payment or distribution out of an edu-
cation investment account to the extent such pay-
ment or distribution is used exclusively to pay the
qualified higher education expenses of the account
holder.
‘‘(3) SPECIAL
RULE
FOR
APPLYING
SECTION
2503.—If any payment or distribution from an edu-
cation investment account is used exclusively for the
payment to an eligible educational institution of the
qualified higher education expenses of the account
holder, such payment shall be treated as a qualified
transfer for purposes of section 2503(e).
‘‘(4) ADDITIONAL TAX AND CREDIT RECAPTURE
FOR DISTRIBUTIONS NOT USED FOR EDUCATIONAL
EXPENSES.—
‘‘(A) IN GENERAL.—
‘‘(i) ADDITIONAL TAX.—The tax im-
posed by this chapter for any taxable year
on any taxpayer who receives a payment or
distribution from an education investment
account which is includible in gross income
under paragraph (1) shall be increased by
10 percent of the amount which is so in-
cludible.
‘‘(ii) CREDIT
RECAPTURE.—If any
payment or distribution out of an edu-
cation investment account is not used ex-
clusively to pay the qualified higher edu-
cation expenses of the account holder, the
account holder’s tax imposed by this chap-
ter for the taxable year in which such pay-
ment or distribution is made shall be in-
creased by the lesser of the amount of the
payment or distribution or the excess (if
any) of—
‘‘(I) the aggregate credit allowed
under this section for contributions to
such account, over
‘‘(II) the aggregate increase in
tax under this clause for all prior tax-
able years with respect to payments
and distributions out of such account.
‘‘(B) EXCEPTION FOR DISABILITY, DEATH,
OR SCHOLARSHIP.—Subparagraph (A) shall not
apply if the payment or distribution is—
‘‘(i) made on account of the death or
disability of the account holder, or
‘‘(ii) made on account of a scholarship
(or allowance or payment described in sec-
tion 135(d)(1) (B) or (C)) received by the
account holder to the extent the amount of
the payment or distribution does not ex-
ceed the amount of the scholarship, allow-
ance, or payment.
‘‘(C) EXCESS CONTRIBUTIONS RETURNED
BEFORE
DUE
DATE
OF
RETURN.—Subpara-
graph (A) shall not apply to the distribution to
a contributor of any contribution paid during a
taxable year to an education investment account
to the extent that such contribution, when
added to previous contributions to the account
during the taxable year, exceeds $1,500 if—
‘‘(i) such distribution is received on or
before the day prescribed by law (including
extensions of time) for filing such contribu-
tor’s return for such taxable year, and
‘‘(ii) such distribution is accompanied
by the amount of net income attributable
to such excess contribution.
Any net income described in clause (ii) shall be
included in the gross income of the contributor
for the taxable year in which such excess con-
tribution was made.
‘‘(5) ROLLOVER
CONTRIBUTIONS.—Paragraph
(1) shall not apply to any amount paid or distrib-
uted from an education investment account to the
extent that the amount received is paid into another
education investment account for the benefit of the
account holder not later than the 60th day after the
day on which the holder receives the payment or dis-
tribution. The preceding sentence shall not apply to
any payment or distribution if it applied to any prior
payment or distribution during the 12-month period
ending on the date of the payment or distribution.
‘‘(6) SPECIAL
RULES
FOR
DEATH
AND
DI-
VORCE.—Rules similar to the rules of section 220(f)
(7) and (8) shall apply.
‘‘(f) COMMUNITY PROPERTY LAWS.—This section
shall be applied without regard to any community property
laws.
‘‘(g) CUSTODIAL ACCOUNTS.—For purposes of this
section, a custodial account shall be treated as a trust if
the assets of such account are held by a bank (as defined
in section 408(n)) or another person who demonstrates,
to the satisfaction of the Secretary, that the manner in
which he will administer the account will be consistent
with the requirements of this section, and if the custodial
account would, except for the fact that it is not a trust,
constitute an account described in subsection (b)(1). For
purposes of this title, in the case of a custodial account
treated as a trust by reason of the preceding sentence,
the custodian of such account shall be treated as the trust-
ee thereof.
‘‘(h) REPORTS.—The trustee of an education invest-
ment account shall make such reports regarding such ac-
count to the Secretary and to the account holder with re-
spect to contributions, distributions, and such other mat-
ters as the Secretary may require under regulations. The
reports required by this subsection shall be filed at such
time and in such manner and furnished to such individuals
at such time and in such manner as may be required by
those regulations.’’
(b) TAX ON PROHIBITED TRANSACTIONS.—Section
4975 (relating to prohibited transactions) is amended—
(1) by adding at the end of subsection (c) the
following new paragraph:
‘‘(5) SPECIAL RULE FOR EDUCATION INVEST-
MENT ACCOUNTS.—An individual for whose benefit
an education investment account is established and
any contributor to such account shall be exempt
from the tax imposed by this section with respect to
any transaction concerning such account (which
would otherwise be taxable under this section) if,
with respect to such transaction, the account ceases
to be an education investment account by reason of
the application of section 24 to such account.’’; and
(2) in subsection (e)(1), by striking ‘‘or’’ at the
end of subparagraph (D), by redesignating subpara-
graph (E) as subparagraph (F), and by inserting
after subparagraph (D) the following new subpara-
graph:
‘‘(E) a education investment account de-
scribed in section 24(c), or’’.
(c) FAILURE TO PROVIDE REPORTS ON EDUCATION
INVESTMENT ACCOUNTS.—Section 6693 (relating to fail-
ure to provide reports on individual retirement accounts
or annuities) is amended—
(1) by striking ‘‘INDIVIDUAL RETIREMENT’’
and inserting ‘‘CERTAIN
TAX-FAVORED’’ in the
heading of such section, and
(2) in subsection (a)(2), 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 24(h) (relating to education
investment accounts).’’
(d) COORDINATION WITH SAVINGS BOND EXCLU-
SION.—Section 135(d)(1) is amended by striking ‘‘or’’ at
the end of subparagraph (C), by striking the period at the
end of subparagraph (D) and inserting ‘‘, or’’ , and by
adding at the end the following new subparagraph:
‘‘(E) a payment or distribution from an
education investment account (as defined in
section 24(c)).’’
(e) CLERICAL AMENDMENTS.—
(1) The table of sections for subpart A of part
IV of subchapter A of chapter 1 is amended by in-
serting after the item relating to section 23 the fol-
lowing new item:
‘‘Sec. 24. Contributions to education investment accounts.’’
(2) The item relating to section 6693 in the
table of sections for subchapter B of chapter 68 is
amended by striking ‘‘individual retirement’’ and in-
serting ‘‘certain tax-favored’’.
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
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