[House Document 104-34]
[From the U.S. Government Publishing Office]





                                     

        104th Congress, 1st Session - - - - - - - - - - - - - House 
Document 104-34



                         PROPOSED LEGISLATION:
 
         ``MIDDLE-CLASS BILL OF RIGHTS TAX RELIEF ACT OF 1995''

                               __________

                                MESSAGE

                                  FROM

                   THE PRESIDENT OF THE UNITED STATES

                              TRANSMITTING

A DRAFT OF PROPOSED LEGISLATION ENTITLED, ``MIDDLE-CLASS BILL OF RIGHTS 
                        TAX RELIEF ACT OF 1995''




  February 13, 1995.--Message and accompanying papers referred to the 
         Committee on Ways and Means and ordered to be printed.
To the Congress of the United States:
    I am pleased to transmit today for your immediate 
consideration and enactment the ``Middle-Class Bill of Rights 
Tax Relief Act of 1995.'' I am also sending you an explanation 
of the revenue proposals of this legislation.
    This bill is the next step in my Administration's 
continuing effort to raise living standards for working 
families and help restore the American Dream for all our 
people.
    For 2 years, we have worked hard to strengthen our economy. 
We worked with the last Congress to enact legislation that will 
reduce the annual deficits of the 1994-98 by more than $600 
billion; we created nearly 6 million new jobs; we cut taxes for 
15 million low-income families and gave tax relief to small 
businesses; we opened export markets through global and 
regional trade agreements; we invested in human and physical 
capital to increase productivity; and we reduced the Federal 
Government by more than 100,000 positions.
    With that strong foundation in place, I am now proposing a 
Middle Class Bill of Rights. Despite our progress, too many 
Americans are still working harder for less. The Middle Class 
Bill of Rights will enable working Americans to raise their 
families and get the education and training they need to meet 
the demands of a new global economy. It will let middle-income 
families share in our economic prosperity today and help them 
build our economic prosperity tomorrow.
    The ``Middle-Class Bill of Right Tax Relief Act of 1995'' 
includes three of the four elements of my Middle Class Bill of 
Rights. First, it offers middle-income families a $500 tax 
credit for each child under 13. Second, it includes a tax 
deduction of up to $10,000 a year to help middle-income 
Americans pay for postsecondary education expenses and training 
expense. Third, it lets more middle-income Americans make tax-
deductible contributions to Individual Retirement Accounts and 
withdraw from the, penalty-free, for the costs of education and 
training, health care, first-time home-buying, long periods of 
unemployment, or the care of an ill parent.
    The fourth element of my Middle Class Bill of Rights--not 
included in this legislation--is the GI Bill for America's 
Workers, which consolidates 70 Federal training programs and 
creates a more effective system for learning new skills and 
finding better jobs for adults and youth. Legislation for this 
proposal is being developed in cooperation with the Congress.
    If enacted, the Middle Class Bill of Rights will help keep 
the American Dream alive for everyone willing to take 
responsibility for themselves, their families, and their 
futures. And it will not burden our children with more debt. In 
my fiscal 1996 budget, we have found enough savings not only to 
pay for this tax bill, but also to provide another $81 billion 
in deficit reduction between 1996 and 2000.
    This legislation will restore fairness to our tax system, 
let middle-income families share in our economic prosperity, 
encourage Americans to prepare for the future, and help ensure 
that the United States moves into the 21st Century still the 
strongest Nation in the world. I urge the Congress to take 
prompt and favorable action on this legislation.
                                                William J. Clinton.
    The White House, February 13, 1995.
A BILL To amend the Internal Revenue Code of 1986 to provide tax relief 
                          for the middle class

    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 ``Middle-
Class Bill of Rights Tax Relief Act of 1995''.
    (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.
    (c) Table of Contents.--

Sec. 1. Short title; amendment of 1986 Code.

                    TITLE I--MIDDLE CLASS TAX RELIEF

Sec. 101. Credit for families with young children.
Sec. 102. Deduction for higher education expenses.

      TITLE II--PROVISIONS RELATING TO INDIVIDUAL RETIREMENT PLANS

                Subtitle A--Retirement Savings Incentives

                          PART I--IRA DEDUCTION

Sec. 201. Increase in income limitations.
Sec. 202. Inflation adjustment for deductible amount and income 
          limitations.
Sec. 203. Coordination of IRA deduction limit with elective deferral 
          limit.

                  PART II--NONDEDUCTIBLE TAX-FREE IRA'S

Sec. 211. Establishment of nondeductible tax-free individual retirement 
          accounts.

                 Subtitle B--Penalty-Free Distributions

Sec. 221. Distributions from certain plans may be used without penalty 
          to purchase first homes, to pay higher education or 
          financially devastating medical expenses, or by the 
          unemployed.
Sec. 222. Contributions must be held at least 5 years in certain cases.
                    TITLE I--MIDDLE CLASS TAX RELIEF

SEC. 101. CREDIT FOR FAMILIES WITH YOUNG CHILDREN.

    (a) In General.--Subpart A of part IV of subchapter A of 
chapter 1 (relating to nonrefundable personal credits) is 
amended by inserting after section 22 the following new 
section:

``SEC. 23. FAMILIES WITH YOUNG CHILDREN.

    ``(a) Allowance of credit.--
          ``(1) In General.--In the case of an individual, 
        there shall be allowed as a credit against the tax 
        imposed by this chapter for the taxable year an amount 
        equal to $300 multiplied by the number of eligible 
        children of the taxpayer for the taxable year.
          ``(2) Increase in credit.--In the case of taxable 
        years beginning after December 31, 1998, paragraph (1) 
        shall be applied by substituting `$500' for `$300'.
    ``(b) Limitations.--
          ``(1) Phase-out of credit.--
                  ``(A) In general.--The amount of the credit 
                allowed under subsection (a) shall be reduced 
                (but not below zero) by the amount determined 
                under subparagraph (B).
                  ``(B) Amount of reduction.--The amount 
                determined under this subparagraph equals the 
                amount which bears the same ratio to the credit 
                (determined without regard to this subsection) 
                as--
                          ``(i) the excess of--
                                  ``(I) the taxpayer's adjusted 
                                gross income for such taxable 
                                year, over
                                  ``(II) $60,000, bears to
                          ``(ii) $15,000.
                Any amount determined under this subparagraph 
                which is not a multiple of $10 shall be rounded 
                to the next lowest $10.
                  ``(C) Adjusted gross income.--For purposes of 
                this paragraph, adjusted gross income of any 
                taxpayer shall be increased by any amount 
                excluded from gross income under section 911, 
                931, or 933.
          ``(2) Limitation based on amount of tax.--The credit 
        allowed by subsection (a) for the taxable year (after 
        the application of paragraph (1)) shall not exceed the 
        excess (if any) of--
                  ``(A) the taxpayer's regular tax liability 
                for the taxable year reduced by the credits 
                allowable against such tax under this subpart 
                (other than this section) determined without 
                regard to section 26, over
                  ``(B) the sum of--
                          ``(i) the taxpayer's tentative 
                        minimum tax for such taxable year, plus
                          ``(ii) the credit allowed for the 
                        taxable year under section 32.
    ``(c) Eligible Child.--For purposes of this section, the 
term `eligible child' means any child (as defined in section 
151(c)(3)) of the taxpayer--
          ``(1) who has not attained age 13 as of the close of 
        the calendar year in which the taxable year of the 
        taxpayer begins,
          ``(2) who is a dependent of the taxpayer with respect 
        to whom the taxpayer is allowed a deduction under 
        section 151 for such taxable year, and
          ``(3) whose TIN is included on the taxpayer's return 
        for such taxable year.
    ``(d) Inflation Adjustments.--In the case of a taxable year 
beginning in a calendar year after 1999--
          ``(1) In general.--The $500 and $60,000 amounts 
        contained in subsections (a)(2) and (b)(2) shall each 
        be increased by an amount equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for the 
                calendar year in which the taxable year begins, 
                determined by substituting `calendar year 1998' 
                for `calendar year 1992' in subparagraph (B) 
                thereof.
          ``(2) Increase in phaseout range.--If the amount 
        applicable under subsection (a) for any taxable year 
        exceeds $500, subsection (b)(2)(B) shall be applied by 
        substituting an amount equal to 30 times such 
        applicable amount for `$15,000'.
          ``(3) Rounding.--If any amount as adjusted under 
        paragraph (1) is not a multiple of $100, such amount 
        shall be rounded to the next lowest multiple of $100.
    ``(e) Special Rules.--
          ``(1) Amount of credit may be determined under 
        tables.--The amount of the credit allowed by this 
        section may be determined under tables prescribed by 
        the Secretary.
          ``(2) Certain other rules apply.--Rules similar to 
        the rules of subsections (c)(1) (E) and (F), (d), and 
        (e) of section 32 shall apply for purposes of this 
        section.''
    (b) Clerical Amendment.--The table of sections for subpart 
A of part IV of subchapter A of chapter 1 is amended by 
inserting after the item relating to section 22 the following 
new item:

    ``Sec. 23. Families with young children.''

    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1995.
SEC. 102. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

    (a) Deduction Allowed.--Part VII of subchapter B of chapter 
1 (relating to additional itemized deductions for individuals) 
is amended by redesignating section 220 as section 221 and by 
inserting after section 219 the following new section:

``SEC. 220. HIGHER EDUCATION TUITION AND FEES.

    ``(a) Allowance of Deduction.--In the case of an 
individual, there shall be allowed as a deduction the amount of 
qualified higher education expenses paid by the taxpayer during 
the taxable year.
    ``(b) Limitations.--
          ``(1) Dollar limitation.--
                  ``(A) In general.--The amount allowed as a 
                deduction under subparagraph (a) for any 
                taxable year shall not exceed $10,000.
                  ``(B)  Phase-in.--In the case of taxable 
                years beginning in 1996, 1997, or 1998, 
                `$5,000' shall be substituted for `$10,000' in 
                subparagraph (A).
          ``(2) Limitation based on modified adjusted gross 
        income.--
                  ``(A) In general.--The amount which would 
                (but for this paragraph) be taken into account 
                under paragraph (1) shall be reduced (but not 
                below zero) by the amount determined under 
                subparagraph (B).
                  ``(B) Amount of reduction.--The amount 
                determined under this subparagraph equals the 
                amount which bears the same ratio to the amount 
                which would be so taken into account as--
                          ``(i) the excess of--
                                  ``(I) the taxpayer's modified 
                                adjusted gross income for such 
                                taxable year, over
                                  ``(II) $70,000 ($100,000 in 
                                the case of a joint return), 
                                bears to
                          ``(ii) $20,000.
                  ``(C) Modified adjusted gross income.--The 
                term `modified adjusted gross income' means the 
                adjusted gross income of the taxpayer for the 
                taxable year determined--
                          ``(i) without regard to this section 
                        and sections 911, 931, and 933, and
                          ``(ii) after the application of 
                        sections 86, 135, 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.
                  ``(D) Inflation adjustments.--
                          ``(i) In general.--In the case of a 
                        taxable year beginning after 1999, the 
                        $70,000 and $100,000 amounts described 
                        in subparagraph (B) shall each be 
                        increased by an amount equal to--
                                  ``(I) such dollar amounts, 
                                multiplied by
                                  ``(II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year in which the 
                                taxable year begins, determined 
                                by substituting `calendar year 
                                1998' for `calendar year 1992' 
                                in subparagraph (B) thereof.
                          ``(ii) Rounding.--If any amount as 
                        adjusted under clause (i) is not a 
                        multiple of $5,000, such amount shall 
                        be rounded to the next lowest multiple 
                        of $5,000.
    ``(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 
                charged by an educational institution and 
                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,
                as an eligible student at an institution of 
                higher education.
                  ``(B) Exception for education involving 
                sports, etc.--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 degree program, 
                        or
                          ``(ii) are deductible under this 
                        chapter without regard to this section.
                  ``(C) 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.
                  ``(D) Eligible student.--For purposes of 
                subparagraph (A), the term `eligible student' 
                means a student who--
                          ``(i) meets the requirements of 
                        section 484(a)(1) of the Higher 
                        Education Act of 1965 (20 U.S.C. 
                        1091(a)(1)), as in effect on the date 
                        of the enactment of this section, and
                          ``(ii)(I) is carrying at least one-
                        half the normal full-time work load for 
                        the course of study the student is 
                        pursuing, as determined by the 
                        institution of higher education, or
                          ``(II) is enrolled in a course which 
                        enables the student to improve the 
                        student's job skills or to acquire new 
                        job skills.
                  ``(E) Identification requirement.--No 
                deduction shall be allowed under subsection (a) 
                to a taxpayer with respect to an eligible 
                student unless the taxpayer includes the name, 
                age, and taxpayer identification number of such 
                eligible student on the return of tax for the 
                taxable year.
          ``(2) Institution of higher education.--The term 
        `institution of higher education' means an institution 
        which--
                  ``(A) is described in section 481 of the 
                Higher Education Act of 1965 (20 U.S.C. 1088), 
                as in effect on the date of the enactment of 
                this section, and
                  ``(B) is eligible to participate in programs 
                under title IV of such Act.
    ``(d) Special rules.--
          ``(1) No double benefit.--
                  ``(A) In general.--No deduction shall be 
                allowed under subsection (a) for qualified 
                higher education expenses with respect to which 
                a deduction is allowable to the taxpayer under 
                any other provision of this chapter unless the 
                taxpayer irrevocably waives his right to the 
                deduction of such expenses under such other 
                provision.
                  ``(B) Dependents.--No deduction shall be 
                allowed under subsection (a) to any individual 
                with respect to whom a deduction under section 
                151 is allowable to another taxpayer for a 
                taxable year beginning in the calendar year in 
                which such individual's taxable year begins.
                  ``(C) Savings bond exclusion.--A deduction 
                shall be allowed under subsection (a) for 
                qualified higher education expenses only to the 
                extent the amount of such expenses exceeds the 
                amount excludable under section 135 for the 
                taxable year.
          ``(2) Limitation on taxable year of deduction.--
                  ``(A) In general.--A deduction shall be 
                allowed under subsection (a) for any taxable 
                year only to the extent the qualified higher 
                education expenses are in connection with 
                enrollment 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 if such expenses are in connection with an 
                academic term beginning during such taxable 
                year or during the 1st 3 months of the next 
                taxable year.
          ``(3) 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 enrollment at an eligible 
                educational institution, which is exempt from 
                income taxation by any law of the United 
                States.
          ``(4) No deduction for married individuals filing 
        separate returns.--If the taxpayer is a married 
        individual (within the meaning of section 7703), this 
        section shall apply only if the taxpayer and the 
        taxpayer's spouse file a joint return for the taxable 
        year.
          ``(5) Nonresident aliens.--If the taxpayer is a 
        nonresident alien individual for any portion of the 
        taxable year, this section shall apply only if such 
        individual is treated as a resident alien of the United 
        States for purposes of this chapter by reason of an 
        election under subsection (g) or (h) of section 6013.
          ``(6) 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) Deduction Allowed in Computing Adjusted Gross Income.--
Section 62(a) is amended by inserting after paragraph (15) the 
following new paragraph:
          ``(16) Higher education tuition and fees.--The 
        deduction allowed by section 220.''
    (c) Conforming Amendment.--The table of sections for part 
VII of subchapter B of chapter 1 is amended by striking the 
item relating to section 220 and inserting:

    ``Sec. 220. Higher education tuition and fees.
    ``Sec. 221. Cross reference.''

    (d) Effective Date.-- The amendments made by this section 
shall apply to payments made after December 31, 1995.
      TITLE II--PROVISIONS RELATING TO INDIVIDUAL RETIREMENT PLANS

               Subtitle A--Retirement Savings Incentives

                         PART I--IRA DEDUCTION

SEC. 201. INCREASE IN INCOME LIMITATIONS.

    (a) In General.-- Subparagraph (B) of section 219(g)(3) is 
amended--
          (1) by striking ``$40,000'' in clause (i) and 
        inserting ``$80,000'', and
          (2) by striking ``$25,000'' in clause (ii) and 
        inserting ``$50,000''.
    (b) Phase-Out of Limitations.--Clause (ii) of section 
219(g)(2)(A) is amended by striking ``$10,000'' and inserting 
``an amount equal to 10 times the dollar amount applicable for 
the taxable year under subsection (b)(1)(A)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1995.

SEC. 202. INFLATION ADJUSTMENT FOR DEDUCTIBLE AMOUNT AND INCOME 
                    LIMITATIONS.

    (a) In General.--Section 219 is amended by redesignating 
subsection (h) as subsection (i) and by inserting after 
subsection (g) the following new subsection:
    ``(h) Cost-of-Living Adjustments.--
          ``(1) In general.--In the case of any taxable year 
        beginning in a calendar year after 1996, each dollar 
        amount to which this subsection applies shall be 
        increased by an amount equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for the 
                calendar year in which the taxable year begins, 
                determined by substituting `calendar year 1995' 
                for `calendar year 1992' in subparagraph (B) 
                thereof.
          ``(2) Dollar amounts to which subsection applies.--
        This subsection shall apply to--
                  ``(A) the $2,000 amounts under subsection 
                (b)(1)(A) and (c), and
                  ``(B) the applicable dollar amounts under 
                subsection (g)(3)(B).
          ``(3) Rounding rules.--
                  ``(A) Deduction amounts.--If any amount 
                referred to in paragraph (2)(A) as adjusted 
                under paragraph (1) is not a multiple of $500, 
                such amount shall be rounded to the next lowest 
                multiple of $500.
                  ``(B) Applicable dollar amounts.--If any 
                amount referred to in paragraph (2)(B) as 
                adjusted under paragraph (1) is not a multiple 
                of $5,000, such amount shall be rounded to the 
                next lowest multiple of $5,000.''
    (b) Conforming Amendments.--
          (1) Clause (i) of section 219(c)(2)(A) is amended to 
        read as follows:
                  ``(i) the sum of $250 and the dollar amount 
                in effect for the taxable year under subsection 
                (b)(1)(A), or''.
          (2) Section 408(a)(1) is amended by striking ``in 
        excess of $2,000 on behalf of any individual'' and 
        inserting ``on behalf of any individual in excess of 
        the amount in effect for such taxable year under 
        section 219(b)(1)(A)''.
          (3) Section 408(b)(2)(B) is amended by striking 
        ``$2,000'' and inserting ``the dollar amount in effect 
        under section 219(b)(1)(A)''.
          (4) Subparagraph (A) of section 408(d)(5) is amended 
        by striking ``$2,250'' and inserting ``the dollar 
        amount in effect for the taxable year under section 
        219(c)(2)(A)(i)''.
          (5) Section 408(j) is amended by striking ``$2,000''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1995.

SEC. 203. COORDINATION OF IRA DEDUCTION LIMIT WITH ELECTIVE DEFERRAL 
                    LIMIT.

    (a) In General.--Section 219(b) (relating to maximum amount 
of deduction) is amended by adding at the end the following new 
paragraph:
          ``(4) Coordination with elective deferral limit.--The 
        amount determined under paragraph (1) or subsection 
        (c)(2) with respect to any individual for any taxable 
        year shall not exceed the excess (if any) of--
                  ``(A) the limitation applicable for the 
                taxable year under section 402(g)(1), over
                  ``(B) the elective deferrals (as defined in 
                section 402(g)(3)) of such individual for such 
                taxable year.''
    (b) Conforming Amendment.--Section 219(c) is amended by 
adding at the end the following new paragraph:
    ``(3) Cross reference.--

    ``For reduction in paragraph (2) amount, see subsection (b)(4).''

    (c) Effective Date.--the amendment made by this section 
shall apply to taxable years beginning after December 31, 1995.

                 PART II--NONDEDUCTIBLE TAX-FREE IRA'S

SEC. 211. ESTABLISHMENT OF NONDEDUCTIBLE TAX-FREE INDIVIDUAL RETIREMENT 
                    ACCOUNTS.

    (a) In General.--Subpart A of part I of subchapter D of 
chapter 1 (relating to pension, profit-sharing, stock bonus 
plans, etc.) is amended by inserting after section 408 the 
following new section:

``SEC. 408A. SPECIAL INDIVIDUAL RETIREMENT ACCOUNTS.

    ``(a) General Rule.--Except as provided in this chapter, a 
special individual retirement account shall be treated for 
purposes of this title in the same manner as an individual 
retirement plan.
    ``(b) Special Individual Retirement Account.--Foir purposes 
of this title, the term `special individual retirement account' 
means an individual retirement plan which is designated at the 
time of establishment of the plan as a special individual 
retirement account.
    ``(c) Treatment of Contributions.--
          ``(1) No deduction allowed.--No deduction shall be 
        allowed under section 219 for a contribution to a 
        special individual retirement account.
          ``(2) Contribution limit.--The aggregate amount of 
        contributions for any taxable year to all special 
        individual retirement accounts maintained for the 
        benefit of an individual shall not exceed the excess 
        (if any) of--
                  ``(A) the maximum amount allowable as a 
                deduction under section 219 with respect to 
                such individual for such taxable year, over
                  ``(B) the amount so allowed.
          ``(3) Special rules for qualified transfers.--
                  ``(A) In general.--No rollover contribution 
                may be made to a special individual retirement 
                account unless it is a qualified transfer.
                  ``(B) Limit not to apply.--The limitation 
                under paragraph (2) shall not apply to a 
                qualified transfer to a special individual 
                retirement account.
    ``(d) Tax Treatment of Distributions.--
          ``(1) In general.--Except as provided in this 
        subsection, any amount paid or distributed out of a 
        special individual retirement account shall not be 
        included in the gross income of the distributee.
          ``(2) Exception for earnings on contributions held 
        less than 5 years.--
                  ``(A) In general.--Any amount distributed out 
                of a special individual retirement account 
                which consists of earnings allocable to 
                contributions made to the account during the 5-
                year period ending on the day before such 
                distribution shall be included in the gross 
                income of the distributee for the taxable year 
                in which the distribution occurs.
                  ``(B) Ordering rule.--
                          ``(i) First-in, first-out rule.--
                        Distributions from a special individual 
                        retirement account shall be treated as 
                        having been made--
                                  ``(I) first from the earliest 
                                contribution (and earnings 
                                allocable thereto) remaining in 
                                the account at the time of the 
                                distribution, and
                                  ``(II) then from other 
                                contributions (and earnings 
                                allocable thereto) in the order 
                                in which made.
                          ``(ii) Allocations between 
                        contributions and earnings.--Any 
                        portion of a distribution allocated to 
                        a contribution (and earnings allocable 
                        thereto) shall be treated as allocated 
                        first to the earnings and then to the 
                        contribution.
                          ``(iii) Allocation of earnings.--
                        Earnings shall be allocated to a 
                        contribution in such manner as the 
                        Secretary may be regulations prescribe.
                          ``(iv) Contributions in same year.--
                        Except as provided in regulations, all 
                        contributions made during the same 
                        taxable year may be treated as 1 
                        contribution for purposes of this 
                        subparagraph.
                  ``(C) Cross reference.--

``For additional tax for early withdrawal, see section 72(t).

          ``(3) Qualified transfer.--
                  ``(A) In general.--Paragraph (2) shall not 
                apply to any distribution which is transferred 
                in a qualified transfer to another special 
                individual retirement account.
                  ``(B) Contribution period.--For purposes of 
                paragraph (2), the special individual 
                retirement account to which any contributions 
                are transferred shall be treated as having held 
                such contributions during any period such 
                contributions were held (or are treated as held 
                under this subparagraph) by the special 
                individual retirement account from which 
                transferred.
          ``(4) Special rules relating to certain transfers.
                  ``(A) In general.--Notwithstanding any other 
                provision of law, in the case of a qualified 
                transfer to a special individual retirement 
                account from an individual retirement plan 
                which is not a special individual retirement 
                account--
                          ``(i) there shall be included in 
                        gross income any amount which, but for 
                        the qualified transfer, would be 
                        includible in gross income, but
                          ``(ii) section 72(t) shall not apply 
                        to such amount.
                  ``(B) Time for inclusion.--In the case of any 
                qualified transfer which occurs before January 
                1, 1997, any amount includible in gross income 
                under subparagraph (A) with respect to such 
                contribution shall be includible ratably over 
                the 4-taxable year period beginning in the 
                taxable year in which the amount was paid or 
                distributed out of the individual retirement 
                plan.
      ``(e) Qualified Transfer.--For purposes of this section
          ``(1) In general.--The term `qualified transfer' 
        means a transfer to a special individual retirement 
        account from another such account or from an individual 
        retirement plan but only if such transfer meets the 
        requirements of section 408(d)(3).
          ``(2) Limitation.--A transfer otherwise described in 
        paragraph (1) shall not be treated as a qualified 
        transfer if the taxpayer's adjusted gross income for 
        the taxable year of the transfer exceeds the sum of--
                  ``(A) the applicable dollar amount, plus
                  ``(B) the dollar amount applicable for the 
                taxable year under section 219(g)(2)(A)(ii).
        This paragraph shall not apply to a transfer from a 
        special individual retirement account to another 
        special individual retirement account.
          ``(3) Definitions.--For purposes of this subsection, 
        the terms `adjusted gross income' and `applicable 
        dollar amount' have the meanings given such terms by 
        section 219(g)(3), except subparagraph (A)(ii) thereof 
        shall be applied without regard to the phrase `or the 
        deduction allowable under this section'.''
      (b) Early Withdrawal Penalty.--Section 72(t) is amended 
by adding at the end the following new paragraph:
                  ``(6) Rules relating to special individual 
                retirement accounts.--In the case of a special 
                individual retirement account under section 
                408A--
                          ``(A) this subsection shall only 
                        apply to distributions out of such 
                        account which consist of earnings 
                        allocable to contributions made to the 
                        account during the 5-year period ending 
                        on the day before such distribution, 
                        and
                          ``(B) paragraph (2)(A)(i) shall not 
                        apply to any distribution described in 
                        subparagraph (A).''
    (c) Excess Contributions.--Section 4973(b) is amended by 
adding at the end the following new sentence: ``For purposes of 
paragraphs (1)(B) and (2)(C), the amount allowable as a 
deduction under section 219 shall be computed without regard to 
section 408A.''
      (d) Conforming Amendment.--The table of sections for 
subpart A of part I of subchapter D of chapter 1 is amended by 
inserting after the item relating to section 408 the following 
new item:

    ``Sec. 408A. Special individual retirement accounts.''

    (e) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1995.

                 Subtitle B--Penalty-Free Distributions

SEC. 221. DISTRIBUTIONS FROM CERTAIN PLANS MAY BE USED WITHOUT PENALTY 
                    TO PURCHASE FIRST HOMES, TO PAY HIGHER EDUCATION OR 
                    FINANCIALLY DEVASTATING MEDICAL EXPENSES, OR BY THE 
                    UNEMPLOYED.

    (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:
                  ``(D) Distributions from certain plans for 
                first home purchases or educational expenses.--
                Distributions to an individual from an 
                individual retirement plan--
                          ``(i) which are qualified first-time 
                        homebuyer distributions (as defined in 
                        paragraph(7)); or
                          ``(ii) to the extent such 
                        distributions do not exceed the 
                        qualified higher education expenses (as 
                        defined in paragraph (8)) of the 
                        taxpayer for the taxable year.''
    (b) Financially Devastating Medical Expenses.--
          (1) In general.--Section 72(t)(3)(A) is amended by 
        striking ``(B),''.
          (2) Certain lineal descendants and ancestors treated 
        as dependents and long-term care services treated as 
        medical care.--Subparagraph (B) of section 72(t)(2) is 
        amended by striking ``medical care'' and all that 
        follows and inserting ``Medical Care determined--
                  ``(i) without regard to whether the employee 
                itemizes deductions for such taxable year, and
                  ``(ii) in the case of an individual 
                retirement plan--
                          ``(I) by treating such employee's 
                        dependents as including all children, 
                        grandchildren and ancestors of the 
                        employee or such employee's spouse and
                          ``(II) by treating qualified long-
                        term care services (as defined in 
                        paragraph (9)) as medical care for 
                        purposes of this subparagraph (B).''
          (3) Conforming amendment.--Subparagraph (B) of 
        section 72(t)(2) is amended by striking ``or (C)'' and 
        inserting ``, (C) or (D)''.
    (c) Definitions.--Section 72(t), as amended by this Act, is 
amended by adding at the end the following new paragraphs:
          ``(7) Qualified first-time homebuyer distributions.--
        For purposes of paragraph (2)(D)(i)--
                  ``(A) In general.--The term `qualified first-
                time homebuyer distribution' means any payment 
                or distribution received by an individual to 
                the extent such payment or distribution is used 
                by the individual before the close of the 60th 
                day after the day on which such payment or 
                distribution is received to pay qualified 
                acquisition costs with respect to a principal 
                residence of a first-time homebuyer who is such 
                individual or the spouse, child (as defined in 
                section 151(c)(3)), or grandchild of such 
                individual.
                  ``(B) Qualified acquisition costs.--For 
                purposes of this paragraph, the term `qualified 
                acquisition costs' means the costs of 
                acquiring, constructing, or reconstructing a 
                residence. Such term includes any usual or 
                reasonable settlement, financing, or other 
                closing costs.
                  ``(C) First-time homebuyer; other 
                definitions.--For purposes of this paragraph--
                          ``(i) First-time homebuyer.--The term 
                        `first-time homebuyer' means any 
                        individual if--
                                  ``(I) such individual (and if 
                                married, such individual's 
                                spouse) had no present 
                                ownership interest in a 
                                principal residence during the 
                                3-year period ending on the 
                                date of acquisition of the 
                                principal residence to which 
                                this paragraph applies, and
                                  ``(II) subsection (h) or (k) 
                                of section 1034 did not suspend 
                                the running of any period of 
                                time specified in section 1034 
                                with respect to such individual 
                                on the day before the date the 
                                distribution is applied 
                                pursuant to subparagraph (A).
                        In the case of an individual described 
                        in section 143(i)(1)(C) for any year, 
                        an ownership interest shall not include 
                        any interest under a contract of deed 
                        described in such section. An 
                        individual who loses an ownership 
                        interest in a principal residence 
                        incident to a divorce or legal 
                        separation is deemed for purposes of 
                        this subparagraph to have had no 
                        ownership interest in such principal 
                        residence within the period referred to 
                        in subparagraph (A)(II).
                          ``(ii) Principal residence.--The term 
                        `principal residence' has the same 
                        meaning as when used in section 1034.
                          ``(iii) Date of acquisition.--The 
                        term `date of acquisition' means the 
                        date--
                                  ``(I) on which a binding 
                                contract to acquire the 
                                principal residence to which 
                                subparagraph (A) applies is 
                                entered into, or
                                  ``(II) on which construction 
                                or reconstruction of such a 
                                principal residence is 
                                commenced.
                  ``(D) Special rule where delay in 
                acquisition.--If any distribution from any 
                individual retirement plan fails to meet the 
                requirements of subparagraph (A) solely by 
                reason of a delay or cancellation of the 
                purchase or construction of the residence, the 
                amount of the distribution may be contributed 
                to an individual retirement plan as provided in 
                section 408(d)(3)(A)(i) (determined by 
                substituting `120 days' for `60 days' in such 
                section), except that--
                          ``(i) section 408(d)(3)(B) shall not 
                        be applied to such contribution, and
                          ``(ii) such amount shall not be taken 
                        into account in determining whether 
                        section 408(d)(3)(A)(i) applies to any 
                        other amount.
          ``(8) Qualified higher education expenses.--For 
        purposes of paragraph (2)(D)(ii)--
                  ``(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,
                          ``(iii) a dependent of the taxpayer 
                        with respect to whom the taxpayer is 
                        allowed a deduction under section 151, 
                        or
                          ``(iv) the taxpayer's child (as 
                        defined in section 151(c)(3)) or 
                        grandchild,
                as an eligible student at an institution of 
                higher education (as defined in paragraphs 
                (1)(D) and (2) of section 220(c)).
                  ``(B) Exceptions.--The term `qualified higher 
                education expenses' does not include expenses 
                described in subparagraphs (B) and (C) of 
                section 220(c)(1).
                  ``(C) Coordination with savings bond 
                provisions.--The amount of qualified higher 
                education expenses for any taxable year shall 
                be reduced by any amount excludable from gross 
                income under section 135.
          ``(9) Qualified long-term care services.--For 
        purposes of paragraph (2)(B)--
                  ``(A) In general.--The term `qualified long-
                term care services' means necessary diagnostic, 
                curing, mitigating, treating, preventive, 
                therapeutic, and rehabilitative services, and 
                maintenance and personal care services (whether 
                performed in a residential or nonresidential 
                setting) which--
                          ``(i) are required by an individual 
                        during any period the individual is an 
                        incapacitated individual (as defined in 
                        subparagraph (B)),
                          ``(ii) have as their primary 
                        purpose--
                                  ``(I) the provision of needed 
                                assistance with 1 or more 
                                activities of daily living (as 
                                defined in subparagraph (C)), 
                                or
                                  ``(II) protection from 
                                threats to health and safety 
                                due to severe cognitive 
                                impairment, and
                          ``(iii) are provided pursuant to a 
                        continuing plan of care prescribed by a 
                        licensed professional (as defined in 
                        subparagraph (D)).
                  ``(B) Incapacitated individual.--The term 
                `incapacitated individual' means any individual 
                who--
                          ``(i) is unable to perform, without 
                        substantial assistance from another 
                        individual (including assistance 
                        involving cueing or substantial 
                        supervision), at least 2 activities of 
                        daily living as defined in subparagraph 
                        (C), or
                          ``(ii) has severe cognitive 
                        impairment as defined by the Secretary 
                        in consultation with the Secretary of 
                        Health and Human Services.
                Such term shall not include any individual 
                otherwise meeting the requirements of the 
                preceding sentence unless a licensed 
                professional within the preceding 12-month 
                period has certified that such individual meets 
                such requirements.
                  ``(C) Activities of daily living.--Each of 
                the following is an activity of daily living:
                          ``(i) Eating.
                          ``(ii) Toileting.
                          ``(iii) Transferring.
                          ``(iv) Bathing.
                          ``(v) Dressing.
                  ``(D) Licensed professional.--The term 
                `licensed professional' means--
                          ``(i) a physician or registered 
                        professional nurse, or
                          ``(ii) any other individual who meets 
                        such requirements as may be prescribed 
                        by the Secretary after consultation 
                        with the Secretary of Health and Human 
                        Services.
                  ``(E) Certain services not included.--The 
                term `qualified long-term care services' shall 
                not include any services provided to an 
                individual--
                          ``(i) by a relative (directly or 
                        through a partnership, corporation, or 
                        other entity) unless the relative is a 
                        licensed professional with respect to 
                        such services, or
                          ``(ii) by a corporation or 
                        partnership which is related (within 
                        the meaning of section 267(b) or 
                        707(b)) to the individual.
                For purposes of this subparagraph, the term 
                `relative' means an individual bearing a 
                relationship to the individual which is 
                described in paragraphs (1) through (8) of 
                section 152(a).''
    (d) Penalty-Free Distributions for Certain Unemployed 
Individuals.--Paragraph (2) of section 72(t) is amended by 
adding at the end the following new subparagraph:
                  ``(E) Distributions to unemployment 
                individuals.--A distribution from an individual 
                retirement plan to an individual after 
                separation from employment, if--
                          ``(i) such individual has received 
                        unemployment compensation for 12 
                        consecutive weeks under any Federal or 
                        State unemployment compensation law by 
                        reason of such separation, and
                          ``(ii) such distributions are made 
                        during any taxable year during which 
                        such unemployment compensation is paid 
                        or the seeding taxable year.''
    (e) Effective Date.--The amendments made by this section 
shall apply to payments and distributions after December 31, 
1995.

SEC. 222. CONTRIBUTIONS MUST BE HELD AT LEAST 5 YEARS IN CERTAIN CASES.

    (a) In General.--Section 72(t), as amended by this Act, is 
amended by adding at the end the following new paragraph:
          ``(10) Certain contributions must be held 5 years.--
                  ``(A) In general.--Paragraph (2)(A)(i) shall 
                not apply to any amount distributed out of an 
                individual retirement plan (other than a 
                special individual retirement account) which is 
                allocable to contributions made to the plan 
                during the 5-year period ending on the date of 
                such distribution (and earnings on such 
                contributions).
                  ``(B) Ordering rule.--For purposes of this 
                paragraph distributions shall be treated as 
                having been made--
                          ``(i) first from the earliest 
                        contribution (and earnings allocable 
                        thereto) remaining in the account at 
                        the time of the distribution, and
                          ``(ii) then from other contributions 
                        (and earnings allocable thereto) in the 
                        order in which made.
                Earnings shall be allocated to contributions in 
                such manner as the Secretary may prescribed.
                  ``(C) Special rule for rollovers.--
                          ``(i) Pension plans.--Subparagraph 
                        (A) shall not apply to distributions 
                        out of an individual retirement plan 
                        which are allocable to rollover 
                        contributions to which section 402(c), 
                        403(a)(4), or 403(b)(8) applied.
                          ``(ii) Contribution period.--For 
                        purposes of subparagraph (A), amounts 
                        shall be treated as having been held by 
                        a plan during any period such 
                        contributions were held (or are treated 
                        as held under this clause) by any 
                        individual retirement plan from which 
                        transferred.
                  ``(D) Special accounts.--For rules applicable 
                to special individual retirement accounts under 
                section 408A, see paragraph (8).''
    (b) Effective Date.--The amendment made by this section 
shall apply to contributions (and earnings allocable thereto) 
which are made after December 31, 1995.
                   Tax Credit for Dependent Children

                              current law

    A tax exemption, in the form of a deduction, is allowed for 
each taxpayer and for each dependent of a taxpayer. A dependent 
includes a child of the taxpayer who is supported by the 
taxpayer and is under age 19 at the close of the calendar year 
or is a student under age 24. The deduction amount is $2,500 
for tax year 1995. This amount is indexed annually for 
inflation.
    In addition to an exemption for each child, three other tax 
benefits may accrue to taxpayers with dependent or otherwise 
qualifying children:
          The credit for child and dependent care expenses,
          The exclusion for employer-provided child and 
        dependent care benefits, and
          The earned income tax credit (EITC).
    The EITC is a refundable tax credit based on the earnings 
of the taxpayer. The EITC is restricted to lower-income 
taxpayers and is phased out when earnings exceed specified 
levels. Although the EITC is available for taxpayers without 
dependents or otherwise qualifying children, the credit rate 
and income range of the credit are far greater when the 
taxpayer has one or more qualifying children. In addition, the 
rate and income range are higher for taxpayers with two or more 
qualifying children than for taxpayers with only one qualifying 
child.

                           reasons for change

    Tax relief for middle-class families has been and continues 
to be an important goal of this Administration. In 1993, the 
Administration faced a projection of ever-increasing deficits. 
Bringing the deficit under control and providing tax relief for 
the working poor through an expansion of the EITC were the 
first priorities. Having achieved more favorable than projected 
results from the deficit reduction program introduced in 1993, 
the Administration can now turn to providing tax relief to 
middle-income families.
    Tax relief to taxpayers with children is needed to adjust 
the relative tax burdens of smaller and larger families to 
reflect more accurately their relative abilities to pay taxes. 
Available resources should be targeted to those in greatest 
need and at greatest risk.

                                proposal

    A nonrefundable tax credit, which would be applied after 
the EITC, would be allowed for each dependent child under age 
13. It would be phased in, at $300 per child for tax years 
1996, 1997, and 1998, and $500 per child for 1999 and 
thereafter. The credit would not reduce any alternative minimum 
tax liability. The credit would be phased out for taxpayers 
with adjusted gross income between $60,000 and $75,000. 
Beginning in the year 2000, both the amount of the credit and 
the phase-out range would be indexed for the effects of 
inflation.
    Taxpayers claiming the dependent child credit would be 
required to provide valid social security numbers for 
themselves, their spouses, and their children who qualify for 
the credit. The procedures that would apply for determining the 
validity of social security numbers under the EITC, discussed 
below, would apply for purposes of the dependent child credit.

                                                REVENUE ESTIMATE                                                
                                            [In billions of dollars]                                            
----------------------------------------------------------------------------------------------------------------
                                                                            Fiscal Years                        
                                                  --------------------------------------------------------------
                                                     1995     1996     1997     1998     1999     2000    Total 
----------------------------------------------------------------------------------------------------------------
Tax credit for dependent children................        0     -3.5     -6.8     -6.6     -8.3    -10.1    -35.4
----------------------------------------------------------------------------------------------------------------

                Education and Job Training Tax Deduction

                              current law

    Taxpayers generally may not deduct the expenses of higher 
education and training. There are, however, special 
circumstances in which deductions for educational expenses are 
allowed, or in which the payment of educational expenses by 
others is excluded from income.
    Educational expenses may be deductible, but only if the 
taxpayer itemizes, and only to the extent that the expenses, 
along with other miscellaneous itemized deductions, exceed two 
percent of adjusted gross income (AGI). A deduction for 
educational purposes is allowed only if the education maintains 
or improves a skill required in the individual's employment or 
other trade or business, or is required by the individual's 
employer, or by law or regulation for the individual to retain 
his or her current job.
    The interest from qualified U.S. savings bonds is excluded 
from a taxpayer's gross income to the extent the interest is 
used to pay qualified educational expenses. To be qualified, 
the savings bonds must be purchased after December 31, 1989, by 
a person who has attained the age of 24. Qualified educational 
expenses consist of tuition and fees for enrollment of the 
taxpayer, the taxpayer's spouse, or the taxpayer's dependent at 
a public or non-profit institution of higher education, 
including two-year colleges and vocational schools.

                           reasons for change

    Deductions for educational expenses combine needed tax 
relief with preparation for new economic imperatives. The 
expenses of higher education place a significant burden on many 
middle-class families. Grants and subsidized loans are 
available to students from low- and moderate-income families; 
high-income families can afford the costs of higher education.
    Well-educated workers are essential to an economy 
experiencing technological change and facing global 
competition. The Administration believes that reducing the 
after-tax cost of education for individuals and families 
encourages investment in education and training while lowering 
tax burdens for middle-income taxpayers.

                                proposal

    A taxpayer would be allowed to deduct qualified educational 
expenses paid during the taxable year for the education or 
training of the taxpayer, the taxpayer's spouse, or the 
taxpayer's dependent. The deduction would be allowed in 
determining AGI. Therefore, taxpayers could claim the deduction 
even if they do not itemize and even if they do not meet the 
two-percent AGI floor on itemized deductions.
    Qualified educational expenses would be defined as tuition 
and fees charged by educational institutions that are directly 
related to an eligible student's course of study (e.g., 
registration fees, laboratory fees, and extra charges for 
particular courses). Charges and expenses associated with 
meals, lodging, student activities, athletics, health care, 
transportation, books and similar personal, living or family 
expenses would not be included. The expenses of education 
involving sports, games, or hobbies would not be qualified 
educational expenses unless the education is required as part 
of a degree program or related to the student's current 
profession.
    Qualified educational expenses would be deductible in the 
year the expenses are paid, subject to the requirement that the 
education commences or continues during that year or during the 
first three months of the next year. Qualified educational 
expenses paid with the proceeds of a loan generally will be 
deductible (rather than repayment of the loan itself). Normal 
tax benefit rules would apply to refunds (and reimbursements 
through insurance) of previously deducted tuition and fees.
    In 1996, 1997, and 1998, the maximum deduction would be 
$5,000. In 1999 and thereafter, this maximum would increase to 
$10,000. The deduction would be phased out ratably for 
taxpayers with modified AGI between $70,000 and $90,000 
($100,000 and $120,000 for joint returns). Modified AGI would 
include taxable Social Security benefits and amounts otherwise 
excluded with respect to income earned abroad (or income from 
Puerto Rico or U.S. possessions). Beginning in 2000, the income 
phase-out range would be indexed for inflation.
    Any amount taken into account as a qualified educational 
expense would be reduced by educational assistance that is not 
required to be included in the gross income of either the 
student or the taxpayer claiming the deduction. Thus, qualified 
educational expenses would be reduced by scholarship or 
fellowship grants excludable from gross income under section 
117 of the Internal Revenue Code (even if the grants are used 
to pay expenses other than qualified educational expenses) and 
any educational assistance received as veterans' benefits. 
However, no reduction would be required for a gift, bequest, 
devise or inheritance within the meaning of section 102(a).
    An eligible student would be one who is enrolled or 
accepted for enrollment in a degree, certificate, or other 
program (including a program of study abroad approved for 
credit by the institution at which such student is enrolled) 
leading to a recognized educational credential at an eligible 
institution. The student must pursue a course of study on at 
least a half-time basis (or be taking a course to improve or 
acquire job skills), cannot be enrolled in an elementary or 
secondary school, and cannot be a nonresident alien. 
Educational institutions would determine what constitutes a 
half-time basis for individual programs.
    ``Eligible institution'' is defined by reference to section 
481 of the Higher Education Act. Such institutions must have 
entered into an agreement with the Department of Education to 
participate in the student loan program. This definition 
includes certain proprietary institutions.
    This proposal would not affect deductions claimed under any 
other section of the Code, except that any amount deducted 
under another section of the Code could not also be deducted 
under this provision. An eligible student would not be eligible 
to claim a deduction under this provision if that student could 
be claimed as a dependent of another taxpayer.

                                                REVENUE ESTIMATE                                                
                                            [In billions of dollars]                                            
----------------------------------------------------------------------------------------------------------------
                                                                            Fiscal Years                        
                                                  --------------------------------------------------------------
                                                     1995     1996     1997     1998     1999     2000    Total 
----------------------------------------------------------------------------------------------------------------
Education and job training tax deduction.........        0     -0.7     -4.7     -5.0     -5.8     -7.6    -23.7
----------------------------------------------------------------------------------------------------------------

                Expanded Individual Retirement Accounts

                              current law

    Under current law, an individual may make deductible 
contributions to an individual retirement account or individual 
retirement annuity (IRA) up to the lesser of $2,000 or 
compensation (wages and self-employment income). If the 
individual (or the individual's spouse) is an active 
participant in an employer-sponsored retirement plan, the 
$2,000 limit on deductible contributions is phased out for 
couples filing a joint return with adjusted gross income (AGI) 
between $40,000 and $50,000, and for single taxpayers with AGI 
between $25,000 and $35,000. To the extent that an individual 
is not eligible for deductible IRA contributions, he or she may 
make nondeductible IRA contributions (up to the contribution 
limit).
    The earnings on IRA account balances are not included in 
income until they are withdrawn. Withdrawals from an IRA (other 
than withdrawals of nondeductible contributions) are includable 
in income, and must begin by age 70\1/2\. Amounts withdrawn 
before age 59\1/2\ are generally subject to an additional 10 
percent penalty tax. The penalty tax does not apply to 
distributions upon the death or disability of the taxpayer or 
withdrawals in the form of substantially equal periodic 
payments over the life (or life expectancy) of the IRA owner or 
over the joint lives (or life expectancies) of the IRA owner 
and his or her beneficiary.

                           reasons for change

    The Nation's savings rate has declined dramatically since 
the 1970s. The Administration believes that increasing the 
savings rate is essential if the United States is to sustain a 
sufficient level of private investment into the next century. 
Without adequate investment, the continued healthy growth of 
the economy is at risk. The Administration is also concerned 
that many households are not saving enough to provide for long-
term needs such as retirement and education.
    The Administration believes that individuals should be 
encouraged to save, and that tax policies can provide a 
significant incentive. Under current law, however, savings 
incentives in the form of deductible IRAs are not available to 
all middle-income taxpayers. Furthermore, the present-law 
income thresholds for deductible IRAs and the maximum 
contribution amount are not indexed for inflation, so that 
fewer Americans are eligible to make a deductible IRA 
contribution each year, and the amount of the maximum 
contribution is declining in real terms over time. The 
Administration also believes that providing taxpayers with the 
option of making IRA contributions that are nondeductible but 
can be withdrawn tax free will provide an alternative savings 
vehicle that some middle-income taxpayers may find more 
suitable for their savings needs.
    Individuals save for many purposes besides retirement. 
Broadening the tax incentives for non-retirement saving can be 
an important element in any proposal to increase the Nation's 
savings rate. Expanding the flexibility of the IRAs to meet a 
wider variety of savings needs, such as first-time home 
purchases, higher education expenditures, unemployment and 
catastrophic medical and nursing home expenses, should prove to 
be more attractive to many taxpayers than accounts limited to 
retirement savings.

                                proposal

    Expand Deductible IRAs.--Under the proposal the income 
thresholds and phase-out ranges for deductible IRAs would be 
doubled; therefore, eligibility would be phased out for couples 
filing joint returns with AGI between $80,000 and $100,000 and 
for single individuals with AGI between $50,000 and $70,000. 
The income thresholds and the present-law annual contribution 
limit of $2,000 would be indexed for inflation. As under 
current law, any individual who is not an active participant in 
an employer-sponsored plan and whose spouse is also not an 
active participant would be eligible for deductible IRAs 
regardless of income.
    Under the proposal, the IRA contribution limit would be 
coordinated with the current law limits on elective deferrals 
under qualified cash or deferred arrangements (sec. 401(k) 
plans), tax-sheltered annuities (sec. 403(b) annuities), and 
similar plans. The proposal also would provide that the 
present-law rule permitting penalty-free IRA withdrawals after 
an individual reaches age 59\1/2\ does not apply in the case of 
amounts attributable to contributions made during the previous 
five years. This provision does not apply to amounts rolled 
over from tax-qualified plans or tax-sheltered annuities.
    These provisions would be effective January 1, 1996.
    Special IRAs.--Each individual eligible for a traditional 
deductible IRA would have the option of contributing an amount 
up to the contribution limit to either a deductible IRA or to a 
new ``Special IRA.'' Contributions to a Special IRA would not 
be deductible, but if the contributions remained in the account 
for earnings thereon would be tax-free. Withdrawals of earnings 
from Special IRAs during the five-year period after 
contribution would be subject to ordinary income tax. In 
addition, such withdrawals would be subject to the 10-percent 
penalty tax on early withdrawals unless used for one of the 
four purposes described below.
    The proposal would permit individuals whose AGI for a 
taxable year did not exceed the upper end of the new income 
eligibility limits to convert balances in deductible IRAs into 
Special IRAs without being subject to the 10-percent tax on 
early withdrawals. The amount transferred from the deductible 
IRA to the Special IRA generally would be includable in the 
individual's income in the year of the transfer. However, if a 
transfer was made before January 1, 1997, the transferred 
amount included in the individual's income would be spread 
evenly over four taxable years.
    The Special IRA provisions would be effective January 1, 
1996.
    Penalty-Free Distributions.--Amounts could be withdrawn 
penalty-free from deductible IRAs and Special IRAs within the 
five-year period after contribution, if the taxpayer used the 
amounts to pay post-secondary education costs, to buy or build 
a first home, to cover living costs if unemployed, or to pay 
catastrophic medical expenses (including certain nursing home 
costs).
a. Education expenses

    Penalty-free withdrawals would be allowed to the extent the 
amount withdrawn is used to pay qualified higher education 
expenses of the taxpayer, the taxpayer's spouse, the taxpayer's 
dependent, or the taxpayer's child or grandchild (even if not a 
dependent). In general, a withdrawal for qualified higher 
education expenses would be subject to the same requirements as 
the deduction for qualified educational expenses (e.g., the 
expenses are tuition and fees that are charged by educational 
institutions and are directly related to an eligible student's 
course of study).

b. First-time home purchasers

    Penalty-free withdrawals would be allowed to the extent the 
amount withdrawn is used to pay qualified acquisition, 
construction, or reconstruction costs with respect to a 
principal residence of a first-time home buyer who is the 
taxpayer, the taxpayer's spouse, or the taxpayer's child or 
grandchild. A first-time home buyer would be any individual 
(and if married, the individual's spouse) who (1) did not own 
an interest in a principal residence during the three years 
prior to the purchase of a home and (2) was not in an extended 
period for rolling over gain from the sale of a principal 
residence.

c. Unemployment

    Penalty-free withdrawals could be made by an individual 
after the individual is separated from employment if (1) the 
individual has received unemployment compensation for 12 
consecutive weeks and (2) the withdrawal is made in the taxable 
year in which the unemployment compensation is received or the 
succeeding taxable year.

d. Medical care expenses and nursing home costs

    The proposal would extend to IRAs the present-law exception 
to the early withdrawal tax for distributions from tax-
qualified plans and tax-sheltered annuities for certain medical 
care expenses (deductible medical expenses that are subject to 
a floor of 7.5 percent of AGI) and expand the exception for 
IRAs to allow withdrawal for medical care expenses of the 
taxpayer's child, grandchild, parent or grandparent, whether or 
not such person otherwise qualifies as the taxpayer's 
dependent.
    In addition, for purposes of the exemption from the 10 
percent tax on early withdrawals for distributions from IRAs, 
the definition of medical care would include expenses for 
qualified long-term care services for incapacitated 
individuals. Qualified long-term care services generally would 
be services that are required by an incapacitated individual, 
where the primary purposes of the services is to provide needed 
assistance with any activity of daily living or protection from 
threats to health and safety due to severe cognitive 
impairment. An incapacitated individual generally would be a 
person who is certified by a licensed professional within the 
preceding 12-month period as being unable to perform without 
substantial assistance at least two activities of daily living, 
or as having severe cognitive impairment.
    These provisions would be effective January 1, 1996.

                                                REVENUE ESTIMATE                                                
                                            [In billions of dollars]                                            
----------------------------------------------------------------------------------------------------------------
                                                                            Fiscal Years                        
                                                  --------------------------------------------------------------
                                                     1995     1996     1997     1998     1999     2000    Total 
----------------------------------------------------------------------------------------------------------------
Expanded individual retirement accounts..........        0      0.4     -0.3     -0.8     -1.0     -2.0     -3.8
----------------------------------------------------------------------------------------------------------------