[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1627 Introduced in House (IH)]







105th CONGRESS
  1st Session
                                H. R. 1627

 To amend the Internal Revenue Code of 1986 to provide tax incentives 
                         for higher education.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                              May 15, 1997

  Mrs. Johnson of Connecticut (for herself, Mr. Shays, Mr. Camp, Mr. 
  English of Pennsylvania, and Mr. McCrery) 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 provide tax incentives 
                         for higher education.

    Be it enacted by the Senate and House of Representatives 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 
Access and Affordability Act of 1997''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment 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 
provision of the Internal Revenue Code of 1986.

SEC. 2. MODIFICATIONS OF TAX TREATMENT OF QUALIFIED STATE TUITION 
              PROGRAMS.

    (a) Exclusion of Distributions Used for Educational Purposes.--
Subparagraph (B) of section 529(c)(3) is amended to read as follows:
                    ``(B) Distributions for qualified higher education 
                expenses.--Subparagraph (A) shall not apply to any 
                distribution to the extent--
                            ``(i) the distribution is used exclusively 
                        to pay qualified higher education expenses of 
                        the distributee, or
                            ``(ii) the distribution consists of 
                        providing a benefit to the distributee which, 
                        if paid for by the distributee, would 
                        constitute payment of a qualified higher 
                        education expense.''
    (b) Qualified Higher Education Expenses To Include Room and 
Board.--Section 529(e)(3) is amended to read as follows:
            ``(3) Qualified higher education expenses.--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 a designated beneficiary at an 
        eligible educational institution (as defined in section 
        135(c)(3)).''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.

SEC. 3. EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE PROGRAMS.

    (a) Permanent Extension.--Section 127 (relating to exclusion for 
educational assistance programs) is amended by striking subsection (d) 
and by redesignating subsection (e) as subsection (d).
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1996.

SEC. 4. DEDUCTION FOR INTEREST ON EDUCATION LOANS.

    (a) In General.--Part VII of subchapter B of chapter 1 (relating 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. INTEREST ON EDUCATION LOANS.

    ``(a) Allowance of Deduction.--In the case of an individual, there 
shall be allowed as a deduction for the taxable year an amount equal to 
the interest paid by the taxpayer during the taxable year on any 
qualified education loan.
    ``(b) Maximum Deduction.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        deduction allowed by subsection (a) for the taxable year shall 
        not exceed $2,500.
            ``(2) Limitation based on modified adjusted gross income.--
                    ``(A) In general.--If the modified adjusted gross 
                income of the taxpayer for the taxable year exceeds 
                $45,000 ($65,000 in the case of a joint return), the 
                amount which would (but for this paragraph) be 
                allowable as a deduction under this section shall be 
                reduced (but not below zero) by the amount which bears 
                the same ratio to the amount which would be so 
                allowable as such excess bears to $20,000.
                    ``(B) Modified adjusted gross income.--The term 
                `modified adjusted gross income' means adjusted gross 
                income determined--
                            ``(i) without regard to this section and 
                        sections 135, 911, 931, and 933, and
                            ``(ii) after application of sections 86, 
                        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.
                    ``(C) Inflation adjustment.--In the case of any 
                taxable year beginning after 1997, the $45,000 and 
                $65,000 amounts referred to in subparagraph (A) shall 
                be increased by an amount equal to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for the 
                        calendar year in which the taxable year begins, 
                        by substituting `1996' for `1992'.
                    ``(D) Rounding.--If any amount as adjusted under 
                subparagraph (C) is not a multiple of $50, such amount 
                shall be rounded to the nearest multiple of $50.
    ``(c) Dependents Not Eligible for Deduction.--No deduction shall be 
allowed by this section to an individual for the taxable year if a 
deduction under section 151 with respect to such individual is allowed 
to another taxpayer for the taxable year beginning in the calendar year 
in which such individual's taxable year begins.
    ``(d) Limit on Period Deduction Allowed.--A deduction shall be 
allowed under this section only with respect to interest paid on any 
qualified education loan during the first 60 months (whether or not 
consecutive) in which interest payments are required. For purposes of 
this paragraph, any loan and all refinancings of such loan shall be 
treated as 1 loan.
    ``(e) Definitions.--For purposes of this section--
            ``(1) Qualified education loan.--The term `qualified 
        education loan' means any indebtedness incurred to pay 
        qualified higher education expenses--
                    ``(A) which are incurred on behalf of the taxpayer, 
                the taxpayer's spouse, or any dependent of the taxpayer 
                as of the time the indebtedness was incurred,
                    ``(B) which are paid or incurred within a 
                reasonable period of time before or after the 
                indebtedness is incurred, and
                    ``(C) which are attributable to education furnished 
                during a period during which the recipient was at least 
                a half-time student.
        Such term includes indebtedness used to refinance indebtedness 
        which qualifies as a qualified education loan. The term 
        `qualified education loan' shall not include any indebtedness 
        owed to a person who is related (within the meaning of section 
        267(b) or 707(b)(1)) to the taxpayer.
            ``(2) Qualified higher education expenses.--The term 
        `qualified higher education expenses' means the cost of 
        attendance (as defined in section 472 of the Higher Education 
        Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before 
        the date of the enactment of the Higher Education Access and 
        Affordability Act of 1997) at an eligible educational 
        institution, reduced by the sum of--
                    ``(A) the amount excluded from gross income under 
                section 135 by reason of such expenses,
                    ``(B) the amount of the reduction described in 
                section 135(d)(1), and
                    ``(C) the amount distributed from an individual 
                retirement plan if no penalty is imposed by section 
                72(t) on such amount by reason of such expenses.
        For purposes of the preceding sentence, the term `eligible 
        educational institution' has the same meaning given such term 
        by section 135(c)(3), except that such term shall also include 
        an institution conducting an internship or residency program 
        leading to a degree or certificate awarded by an institution of 
        higher education, a hospital, or a health care facility which 
        offers postgraduate training.
            ``(3) Half-time student.--The term `half-time student' 
        means any individual who would be a student as defined in 
        section 151(c)(4) if `half-time' were substituted for `full-
        time' each place it appears in such section.
            ``(4) Dependent.--The term `dependent' has the meaning 
        given such term by section 152.
    ``(f) Special Rules.--
            ``(1) Denial of double benefit.--No deduction shall be 
        allowed under this section for any amount for which a deduction 
        is allowable under any other provision of this chapter.
            ``(2) Certain rules to apply.--Rules similar to the rules 
        of subsections (d) and (e) of section 32 shall apply for 
        purposes of this section.''
    (b) Deduction Allowed Whether or Not Taxpayer Itemizes Other 
Deductions.--Subsection (a) of section 62 is amended by inserting after 
paragraph (16) the following new paragraph:
            ``(17) Interest on education loans.--The deduction allowed 
        by section 221.''
    (c) Reporting Requirement.--
            (1) In general.--Subpart B of part III of subchapter A of 
        chapter 61 (relating to information concerning transactions 
        with other persons) is amended by inserting after section 6050R 
        the following new section:

``SEC. 6050S. RETURNS RELATING TO EDUCATION LOAN INTEREST RECEIVED IN 
              TRADE OR BUSINESS FROM INDIVIDUALS.

    ``(a) Education Loan Interest of $600 or More.--Any person--
            ``(1) who is engaged in a trade or business, and
            ``(2) who, in the course of such trade or business, 
        receives from any individual interest aggregating $600 or more 
        for any calendar year on 1 or more qualified education loans,
shall make the return described in subsection (b) with respect to each 
individual from whom such interest was received at such time as the 
Secretary may by regulations prescribe.
    ``(b) Form and Manner of Returns.--A return is described in this 
subsection if such return--
            ``(1) is in such form as the Secretary may prescribe,
            ``(2) contains--
                    ``(A) the name, address, and TIN of the individual 
                from whom the interest described in subsection (a)(2) 
                was received,
                    ``(B) the amount of such interest received for the 
                calendar year, and
                    ``(C) such other information as the Secretary may 
                prescribe.
    ``(c) Application to Governmental Units.--For purposes of 
subsection (a)--
            ``(1) Treated as persons.--The term `person' includes any 
        governmental unit (and any agency or instrumentality thereof).
            ``(2) Special rules.--In the case of a governmental unit or 
        any agency or instrumentality thereof--
                    ``(A) subsection (a) shall be applied without 
                regard to the trade or business requirement contained 
                therein, and
                    ``(B) any return required under subsection (a) 
                shall be made by the officer or employee appropriately 
                designated for the purpose of making such return.
    ``(d) Statements To Be Furnished to Individuals With Respect to 
Whom Information Is Required.--Every person required to make a return 
under subsection (a) shall furnish to each individual whose name is 
required to be set forth in such return a written statement showing--
            ``(1) the name and address of the person required to make 
        such return and the phone number of the information contract of 
        such person, and
            ``(2) the aggregate amount of interest described in 
        subsection (a)(2) received by the person required to make such 
        return from the individual to whom the statement is required to 
        be furnished.
The written statement required under the preceding sentence shall be 
furnished on or before January 31 of the year following the calendar 
year for which the return under subsection (a) was required to be made.
    ``(e) Qualified Education Loan Defined.--For purposes of this 
section, except as provided in regulations prescribed by the Secretary, 
the term `qualified education loan' has the meaning given such term by 
section 221(e)(1).
    ``(f) Returns Which Would Be Required To Be Made by 2 or More 
Persons.--Except to the extent provided in regulations prescribed by 
the Secretary, in the case of interest received by any person on behalf 
of another person, only the person first receiving such interest shall 
be required to make the return under subsection (a).''.
            (2) Assessable penalties.--Section 6724(d) (relating to 
        definitions) is amended--
                    (A) in paragraph (1)(B), by redesignating clauses 
                (x) through (xv) as clauses (xi) through (xvi), 
                respectively, and by inserting after clause (ix) the 
                following new clause:
                            ``(x) section 6050S (relating to returns 
                        relating to education loan interest received in 
                        trade or business from individuals),'', and
                    (B) in paragraph (2), by striking ``or'' at the end 
                of the next to last subparagraph, by striking the 
                period at the end of the last subparagraph and 
                inserting ``, or'', and by adding at the end the 
                following new subparagraph:
                    ``(Z) section 6050S(d) (relating to returns 
                relating to education loan interest received in trade 
                or business from individuals).''
    (d) Clerical Amendment.--The table of sections for part VII of 
subchapter B of chapter 1 is amended by striking the last item and 
inserting the following new items:

                              ``Sec. 221. Interest on education loans.
                              ``Sec. 222. Cross reference.''.
    (e) Effective Date.--The amendments made by this section shall 
apply to any qualified education loan (as defined in section 221(e)(1) 
of the Internal Revenue Code of 1986, as added by this section) 
incurred on, before, or after the date of the enactment of this Act, 
but only with respect to any loan interest payment due after December 
31, 1996.

SEC. 5. PENALTY-FREE WITHDRAWALS FROM INDIVIDUAL RETIREMENT PLANS FOR 
              HIGHER EDUCATION EXPENSES.

    (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 subparagraph:
                    ``(E) Distributions from individual retirement 
                plans for higher education expenses.--Distributions to 
                an individual from an individual retirement plan to the 
                extent such distributions do not exceed the qualified 
                higher education expenses (as defined in paragraph (7)) 
                of the taxpayer for the taxable year.''
    (b) Qualified Higher Education Expenses.--Section 72(t) is amended 
by adding at the end the following new paragraph:
            ``(7) Qualified higher education expenses.--For purposes of 
        paragraph (2)(E)--
                    ``(A) In general.--The term `qualified higher 
                education expenses' means the cost of attendance (as 
                defined in section 472 of the Higher Education Act of 
                1965, 20 U.S.C. 1087ll, as in effect on the day before 
                the date of the enactment of the Higher Education 
                Access and Affordability Act of 1997) of--
                            ``(i) the taxpayer,
                            ``(ii) the taxpayer's spouse, or
                            ``(iii) any child (as defined in section 
                        151(c)(3)), grandchild, or ancestor of the 
                        taxpayer or the taxpayer's spouse,
                at an eligible educational institution (as defined in 
                section 135(c)(3)).
                    ``(B) Coordination with other provisions.--The 
                amount of qualified higher education expenses for any 
                taxable year shall be reduced by the sum of--
                            ``(i) the amount excluded from gross income 
                        under section 135 by reason of such expenses, 
                        and
                            ``(ii) the amount of the reduction 
                        described in section 135(d)(1).''
    (c) Effective Date.--The amendments made by this section shall 
apply to distributions after the date of the enactment of this Act.

SEC. 6. EDUCATION INVESTMENT ACCOUNTS.

    (a) In General.--Part VIII of subchapter F of chapter 1 (relating 
to qualified State tuition programs) is amended by adding at the end 
the following new section:

``SEC. 530. EDUCATION INVESTMENT ACCOUNTS.

    ``(a) General Rule.--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 imposition of tax on 
unrelated business income of charitable organizations).
    ``(b) Limitations on Accounts.--
            ``(1) Account may not be established for benefit of more 
        than 1 individual.--An education investment account may not be 
        established for the benefit of more than 1 individual.
            ``(2) Special rule where more than 1 account.--If, at any 
        time during a calendar year, 2 or more education investment 
        accounts are maintained for the benefit of an individual, only 
        the account first established shall be treated as an education 
        investment account for purposes of this section. This paragraph 
        shall not apply to the extent more than 1 account exists solely 
        by reason of a rollover contribution.
    ``(c) Definitions and Special Rules.--For purposes 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 education 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 
                        contributions from another education investment 
                        account, in excess of $1,500 for any calendar 
                        year, and
                            ``(iii) after the date on which the account 
                        holder attains age 18.
                    ``(B) The trustee is a bank (as defined in section 
                408(n)) or another person who demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                that person will administer the trust will be 
                consistent with the requirements of this section.
                    ``(C) No part of the trust assets will be invested 
                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 investment 
                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) 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 taxable 
        year (not including extensions thereof).
            ``(3) Qualified higher education expenses.--
                    ``(A) In general.--The term `qualified higher 
                education expenses' has the meaning given such term by 
                section 529(e)(3), 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 
                        described in section 135(d)(1) (other than 
                        subparagraph (E)).
                    ``(B) State tuition plans.--Such term shall include 
                amounts paid or incurred to purchase tuition credits or 
                certificates, or to make contributions to an account, 
                under a qualified State tuition program (as defined in 
                section 529(b)).
            ``(4) Eligible educational institution.--The term `eligible 
        educational institution' has the meaning given such term by 
        section 135(c)(3).
            ``(5) Account holder.--The term `account holder' means the 
        individual for whose benefit the education investment account 
        is established.
    ``(d) Tax Treatment of Distributions.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, any amount paid or distributed 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 section 72. For purposes of the preceding 
        sentence, rules similar to the rules of section 408(d)(2) shall 
        apply.
            ``(2) Distribution used to pay educational expenses.--
        Paragraph (1) shall not apply to any payment or distribution 
        out of an education investment account to the extent such 
        payment 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 education 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 for distributions not used for 
        educational expenses.--
                    ``(A) In general.--The tax imposed 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 includible.
                    ``(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 section 
                        135(d)(1) (B) or (C)) received by the account 
                        holder to the extent the amount of the payment 
                        or distribution does not exceed the amount of 
                        the scholarship, allowance, or payment.
                    ``(C) Excess contributions returned before due date 
                of return.--Subparagraph (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 
                        contributor'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 contribution was 
                made.
            ``(5) Rollover contributions.--Paragraph (1) shall not 
        apply to any amount paid or distributed 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 distribution. 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 divorce.--Rules similar 
        to the rules of section 220(f) (7) and (8) shall apply.
    ``(e) Tax Treatment of Accounts.--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.
    ``(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 trustee 
thereof.
    ``(h) Reports.--The trustee of an education investment account 
shall make such reports regarding such account to the Secretary and to 
the account holder 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 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 investment 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 530 to such 
        account.''; and
            (2) in subsection (e)(1), 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 investment account described in 
                section 530, or''.
    (c) Failure To Provide Reports on Education Investment Accounts.--
Section 6693 (relating to failure 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 530(h) (relating to education 
                investment accounts).''
    (d) Coordination With Savings Bond Exclusion.--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 530).''
    (e) Clerical Amendments.--
            (1) The table of sections for part VIII of subchapter F of 
        chapter 1 is amended by adding at the end the following new 
        item:

                              ``Sec. 530. Education investment 
                                        accounts.''
            (2)(A) The heading for part VIII of subchapter F of chapter 
        1 is amended to read as follows:

           ``PART VIII--HIGHER EDUCATION SAVINGS ENTITIES''.

            (B) The table of parts for subchapter F of chapter 1 is 
        amended by striking the item relating to part VIII and 
        inserting:

                              ``Part VIII. Higher education savings 
                                        entities.''
            (3) The item relating to section 6693 in the table of 
        sections for subchapter B of chapter 68 is amended by striking 
        ``individual retirement'' and inserting ``certain tax-
        favored''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.
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