[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
----------------------------------------------------------------------------------------------------------------