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Problem: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.
Solution:
Amends the Internal Revenue Code to allow a limited tax credit for educational expenses at a two-year college.