Education savings accounts

(a)

Deduction for contributions

Part VII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to additional itemized deductions for individuals) is amended by redesignating section 224 as section 225 and inserting after section 223 the following new section:

224.

Education savings

(a)

Deduction allowed

In the case of an individual, there shall be allowed as a deduction an amount equal to the amount of contributions made by such individual to an education savings account during the taxable year. (b)

Definitions

(1)

Education savings account

The term education savings account means a trust created or organized in the United States exclusively for the purpose of paying the qualified education expenses of an individual who is the designated beneficiary of the trust (and designated as an education savings account at the time created or organized), 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)after the date on which such beneficiary attains age 18, or (iii)except in the case of rollover contributions described in subsection (e)(4), if such contribution would result in aggregate contributions for the taxable year exceeding $5,000. (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 or who has so demonstrated with respect to any individual retirement plan or any Coverdell education savings account. (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)Except as provided in subsection (e)(6), any balance to the credit of the designated beneficiary on the date on which the beneficiary attains age 30 shall be distributed within 30 days after such date to the beneficiary or, if the beneficiary dies before attaining age 30, shall be distributed within 30 days after the date of death of such beneficiary. (F)The age limitations in subparagraphs (A)(ii) and (E), and paragraphs (4) and (5) of subsection (e), shall not apply to any designated beneficiary with special needs (as determined under regulations prescribed by the Secretary). (2)

Qualified education expenses

The term qualified education expenses has the meaning given such term in section 530(b)(2). (3)

Certain rules to apply

Rules similar to the following rules shall apply for purposes of this section: (A)Section 219(d)(2) (relating to no deduction for rollovers), (B)Section 530(b)(5) (relating to time when contributions deemed made), (C)Section 530(f) (relating to community property laws), (D)Section 530(g) (relating to custodial accounts), and (E)Section 530(h) (relating to reports). (c)

Reduction in permitted contribution based on adjusted gross income

(1)

In general

The maximum amount which a contributor could otherwise make to an account under this section shall be reduced by an amount which bears the same ratio to such maximum amount as— (A)the excess of— (i)the contributor’s modified adjusted gross income for such taxable year, over (ii)$95,000 ($190,000 in the case of a joint return), bears to (B)$15,000 ($30,000 in the case of a joint return). (2)

Modified adjusted gross income

For purposes of paragraph (1), the term modified adjusted gross income means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933. (d)

Tax treatment of accounts

(1)

In general

An education savings account is exempt from taxation under this subtitle unless such account has ceased to be an education savings account. Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations). (2)

Account terminations

Rules similar to the rules of paragraphs (2) and (4) of section 408(e) shall apply to education savings accounts, and any amount treated as distributed under such rules shall be treated as not used to pay qualified education expenses. (e)

Treatment of distributions

(1)

In general

Any distribution shall be includible in the gross income of the distributee in the manner as provided in section 72. (2)

Special rules for applying estate and gift taxes with respect to account

Rules similar to the rules of paragraphs (2), (4), and (5) of section 529(c) shall apply for purposes of this section. (3)

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 savings account which is in excess of the qualified education expenses of the designated beneficiary during the taxable year shall be increased by 10 percent of the amount of such excess. (B)

Exceptions

Subparagraph (A) shall not apply if the payment or distribution is— (i)made to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary, (ii)attributable to the designated beneficiary’s being disabled (within the meaning of section 72(m)(7)), (iii)made on account of a scholarship, allowance, or payment described in section 25A(g)(2) 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, or (iv)made on account of the attendance of the designated beneficiary at the United States Military Academy, the United States Naval Academy, the United States Air Force Academy, the United States Coast Guard Academy, or the United States Merchant Marine Academy, to the extent that the amount of the payment or distribution does not exceed the costs of advanced education (as defined by section 2005(e)(3) of title 10, United States Code, as in effect on the date of the enactment of this section) attributable to such attendance. (C)

Contributions returned before certain date

Subparagraph (A) shall not apply to the distribution of any contribution made during a taxable year on behalf of the designated beneficiary if— (i)such distribution is made before the first day of the sixth month of the taxable year following the 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 gross income for the taxable year in which such excess contribution was made.

(4)

Rollover contributions

Paragraph (1) shall not apply to any amount paid or distributed from an education savings account to the extent that the amount received is paid, not later than the 60th day after the date of such payment or distribution, into another education savings account for the benefit of the same beneficiary or a member of the family (within the meaning of section 529(e)(2)) of such beneficiary who has not attained age 30 as of such date. 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. (5)

Change in beneficiary

Any change in the beneficiary of an education savings account shall not be treated as a distribution for purposes of paragraph (1) if the new beneficiary is a member of the family (as so defined) of the old beneficiary and has not attained age 30 as of the date of such change. (6)

Special rules for death and divorce

Rules similar to the rules of paragraphs (7) and (8) of section 220(f) shall apply. In applying the preceding sentence, members of the family (as so defined) of the designated beneficiary shall be treated in the same manner as the spouse under such paragraph (8). (7)

Deemed distribution on required distribution date

In any case in which a distribution is required under subsection (b)(1)(E), any balance to the credit of a designated beneficiary as of the close of the 30-day period referred to in such subsection for making such distribution shall be deemed distributed at the close of such period.

(b)

Tax on excess contributions

(1)

In general

Subsection (a) of section 4973 of the Internal Revenue Code of 1986 (relating to tax on excess contributions to certain tax-favored accounts and annuities) is amended by striking or at the end of paragraph (4), by inserting or at the end of paragraph (5), and by inserting after paragraph (5) the following new paragraph:

(6)an education savings account (as defined in section 224),

(2)

Excess contribution

Section 4973 of such Code is amended by adding at the end the following new subsection:

(h)

Excess contributions to education savings accounts

For purposes of this section— (1)

In general

In the case of education savings accounts maintained for the benefit of any one beneficiary, the term excess contributions means the sum of— (A)the amount by which the amount contributed for the taxable year to such accounts exceeds $5,000 (or, if less, the sum of the maximum amounts permitted to be contributed under section 224(c) by the contributors to such accounts for such year); and (B)the amount determined under this subsection for the preceding taxable year, reduced by the sum of— (i)the distributions out of the accounts for the taxable year (other than distributions described in section 224(e)(4)); and (ii)the excess (if any) of the maximum amount which may be contributed to the accounts for the taxable year over the amount contributed to the accounts for the taxable year. (2)

Special rules

For purposes of paragraph (1), the following contributions shall not be taken into account: (A)Any contribution which is distributed out of the education savings account in a distribution to which section 224(e)(3)(C) applies. (B)Any rollover contribution.

(c)

Failure to provide reports on education savings accounts

Paragraph (2) of section 6693(a) of the Internal Revenue Code of 1986 (relating to failure to provide reports on individual retirement accounts or annuities) is amended by striking and at the end of subparagraph (D), by striking the period at the end of subparagraph (E) and inserting , and, and by adding at the end the following new subparagraph:

(F)section 224(b)(3)(E) (relating to education savings accounts).

(d)

Clerical amendment

The table of section for part VII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by striking the item relating to section 224 and inserting the following new items:

Sec. 224. Education savings.

Sec. 225. Cross reference.

(e)

Effective date

The amendments made by this section shall apply to contributions made in taxable years beginning after December 31, 2004.