SECTION 1. TAX CREDIT FOR EDUCATION EXPENSES AT 2-YEAR COLLEGES.

    (a) In General.--Subpart A of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 (relating to nonrefundable 
personal credits) is amended by adding at the end the following:

``SEC. 25A. EDUCATION EXPENSES AT 2-YEAR COLLEGES.

    ``(a) Allowance of Credit.--In the case of an individual, there 
shall be allowed as a credit against the tax imposed by this chapter an 
amount equal to the qualified higher education expenses paid by the 
taxpayer during the taxable year.
    ``(b) Limitations.--
            ``(1) Amount of credit.--The amount allowed as a credit 
        under subsection (a) for any taxable year with respect to any 
        student shall not exceed $1,500.
            ``(2) Credit reduced by nontaxable federal assistance.--The 
        amount of the credit allowed under subsection (a) (determined 
        without regard to this paragraph) shall be reduced by any 
        scholarship or grant provided by the Federal Government which 
        is exempt from tax under this chapter.
    ``(c) Qualified Higher Education Expenses.--For purposes of this 
section--
            ``(1) Qualified higher education expenses.--
                    ``(A) In general.--The term `qualified higher 
                education expenses' means tuition and fees 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 allowed a 
                        deduction under section 151,
                in a 2-year degree program at an institution of higher 
                education.
                    ``(B) Exception for education involving sports, 
                inc.--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 2-year degree program, 
                        or
                            ``(ii) are deductible under this chapter.
                    ``(C) Inclusion of reasonable living expenses.--
                Such term shall include reasonable living expenses 
                while away from home.
                    ``(D) 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 academic course of instruction.
            ``(2) Inflation adjustment.--
                    ``(A) In general.--In the case of any taxable year 
                beginning in a calendar year after 1997, the $1,500 
                amount contained in subsection (b)(1) shall be 
                increased by an amount equal to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment under 
                        section 1(f)(3) for the calendar year in which 
                        the taxable year begins, except that section 
                        1(f)(3)(B) shall be applied by substituting 
                        `1996' for `1992'.
                    ``(B) Rounding.--If any amount as adjusted under 
                subparagraph (A) is not a multiple of $50, such amount 
                shall be rounded to the nearest multiple of $50 (or if 
                such amount is a multiple of $25, such amount shall be 
                rounded to the next highest multiple of $50).
            ``(3) Institution of higher education.--The term 
        `institution of higher education' means an institution which--
                    ``(A) is described in section 1201(a) of the Higher 
                Education Act of 1965 (20 U.S.C. 1141), as in effect on 
                the date of enactment of this section, and
                    ``(B) an area vocational education school (as 
                defined in subparagraph (C) or (D) of section 521(4) of 
                the Carl D. Perkins Vocational Education Act) which is 
                in any State (as defined in section 521(33) of such 
                Act), as such sections are in effect on the date of 
                enactment of this section.
    ``(d) No Double Benefit.--No credit shall be allowed under 
subsection (a) for qualified higher education expenses with respect to 
which a deduction is allowed under any other provision of this chapter.
    ``(e) Special Rules.--
            ``(1) Limitation on taxable year of credit.--
                    ``(A) In general.--A credit shall be allowed under 
                subsection (a) for any taxable year only to the extent 
                the qualified higher education expenses are in 
                connection with attendance at an institution of higher 
                education during the taxable year.
                    ``(B) Certain prepayments allowed.--Subparagraph 
                (A) shall not apply to qualified higher education 
                expenses paid during a taxable year which are in 
                connection with attendance at an institution of higher 
                education which begins during the first 2 months of the 
                following taxable year.
            ``(2) Adjustment for certain scholarships 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, bequest, 
                devise, or inheritance within the meaning of section 
                102(a)) for educational expenses, or attributable to 
                attendance at an eligible educational institution, 
                which is exempt from income taxation by any law of the 
                United States.
            ``(3) Regulations.--The Secretary may prescribe such 
        regulations as may be necessary or appropriate to carry out 
        this section, including regulations requiring recordkeeping and 
        information reporting.''.
    (b) Conforming Amendment.--The table of sections for subpart A of 
part IV of subchapter A of chapter 1 of the Internal Revenue Code of 
1986 is amended by inserting after the item relating to section 25 the 
following:

                              ``Sec. 25A. Education expenses at 2-year 
                                        colleges.''.
    (c) Effective Date.--The amendments made by this section apply to 
taxable years beginning after December 31, 1996.
Output: Amends the Internal Revenue Code to allow a limited tax credit for educational expenses at a two-year college.