H.R. 1627 (105th): Higher Education Access and Affordability Act of 1997

105th Congress, 1997–1998. Text as of May 15, 1997 (Introduced).

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HR 1627 IH

105th CONGRESS

1st Session

H. R. 1627

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

IN THE HOUSE OF REPRESENTATIVES

May 15, 1997

Mrs. JOHNSON of Connecticut (for herself, Mr. SHAYS, Mr. CAMP, Mr. ENGLISH of Pennsylvania, and Mr. MCCRERY) introduced the following bill; which was referred to the Committee on Ways and Means


A BILL

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

    Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) SHORT TITLE- This Act may be cited as the ‘Higher Education Access and Affordability Act of 1997’.

    (b) AMENDMENT OF 1986 CODE- Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

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

    (a) EXCLUSION OF DISTRIBUTIONS USED FOR EDUCATIONAL PURPOSES- Subparagraph (B) of section 529(c)(3) is amended to read as follows:

        ‘(B) DISTRIBUTIONS FOR QUALIFIED HIGHER EDUCATION EXPENSES- Subparagraph (A) shall not apply to any distribution to the extent--

          ‘(i) the distribution is used exclusively to pay qualified higher education expenses of the distributee, or

          ‘(ii) the distribution consists of providing a benefit to the distributee which, if paid for by the distributee, would constitute payment of a qualified higher education expense.’

    (b) QUALIFIED HIGHER EDUCATION EXPENSES TO INCLUDE ROOM AND BOARD- Section 529(e)(3) is amended to read as follows:

      ‘(3) QUALIFIED HIGHER EDUCATION EXPENSES- The term ‘qualified higher education expenses’ means the cost of attendance (within the meaning of section 472 of the Higher Education Act of 1965 (20 U.S.C. 1087ll), as in effect on the date of the enactment of the Higher Education Access and Affordability Act of 1997) of a designated beneficiary at an eligible educational institution (as defined in section 135(c)(3)).’

    (c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1996.

SEC. 3. EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE PROGRAMS.

    (a) PERMANENT EXTENSION- Section 127 (relating to exclusion for educational assistance programs) is amended by striking subsection (d) and by redesignating subsection (e) as subsection (d).

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1996.

SEC. 4. DEDUCTION FOR INTEREST ON EDUCATION LOANS.

    (a) IN GENERAL- Part VII of subchapter B of chapter 1 (relating to additional itemized deductions for individuals) is amended by redesignating section 221 as section 222 and by inserting after section 220 the following new section:

‘SEC. 221. INTEREST ON EDUCATION LOANS.

    ‘(a) ALLOWANCE OF DEDUCTION- In the case of an individual, there shall be allowed as a deduction for the taxable year an amount equal to the interest paid by the taxpayer during the taxable year on any qualified education loan.

    ‘(b) MAXIMUM DEDUCTION-

      ‘(1) IN GENERAL- Except as provided in paragraph (2), the deduction allowed by subsection (a) for the taxable year shall not exceed $2,500.

      ‘(2) LIMITATION BASED ON MODIFIED ADJUSTED GROSS INCOME-

        ‘(A) IN GENERAL- If the modified adjusted gross income of the taxpayer for the taxable year exceeds $45,000 ($65,000 in the case of a joint return), the amount which would (but for this paragraph) be allowable as a deduction under this section shall be reduced (but not below zero) by the amount which bears the same ratio to the amount which would be so allowable as such excess bears to $20,000.

        ‘(B) MODIFIED ADJUSTED GROSS INCOME- The term ‘modified adjusted gross income’ means adjusted gross income determined--

          ‘(i) without regard to this section and sections 135, 911, 931, and 933, and

          ‘(ii) after application of sections 86, 219, and 469.

        For purposes of sections 86, 135, 219, and 469, adjusted gross income shall be determined without regard to the deduction allowed under this section.

        ‘(C) INFLATION ADJUSTMENT- In the case of any taxable year beginning after 1997, the $45,000 and $65,000 amounts referred to in subparagraph (A) shall be increased by an amount equal to--

          ‘(i) such dollar amount, multiplied by

          ‘(ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting ‘1996’ for ‘1992’.

        ‘(D) ROUNDING- If any amount as adjusted under subparagraph (C) is not a multiple of $50, such amount shall be rounded to the nearest multiple of $50.

    ‘(c) DEPENDENTS NOT ELIGIBLE FOR DEDUCTION- No deduction shall be allowed by this section to an individual for the taxable year if a deduction under section 151 with respect to such individual is allowed to another taxpayer for the taxable year beginning in the calendar year in which such individual’s taxable year begins.

    ‘(d) LIMIT ON PERIOD DEDUCTION ALLOWED- A deduction shall be allowed under this section only with respect to interest paid on any qualified education loan during the first 60 months (whether or not consecutive) in which interest payments are required. For purposes of this paragraph, any loan and all refinancings of such loan shall be treated as 1 loan.

    ‘(e) DEFINITIONS- For purposes of this section--

      ‘(1) QUALIFIED EDUCATION LOAN- The term ‘qualified education loan’ means any indebtedness incurred to pay qualified higher education expenses--

        ‘(A) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,

        ‘(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and

        ‘(C) which are attributable to education furnished during a period during which the recipient was at least a half-time student.

      Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term ‘qualified education loan’ shall not include any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer.

      ‘(2) QUALIFIED HIGHER EDUCATION EXPENSES- The term ‘qualified higher education expenses’ means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of the Higher Education Access and Affordability Act of 1997) at an eligible educational institution, reduced by the sum of--

        ‘(A) the amount excluded from gross income under section 135 by reason of such expenses,

        ‘(B) the amount of the reduction described in section 135(d)(1), and

        ‘(C) the amount distributed from an individual retirement plan if no penalty is imposed by section 72(t) on such amount by reason of such expenses.

      For purposes of the preceding sentence, the term ‘eligible educational institution’ has the same meaning given such term by section 135(c)(3), except that such term shall also include an institution conducting an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or a health care facility which offers postgraduate training.

      ‘(3) HALF-TIME STUDENT- The term ‘half-time student’ means any individual who would be a student as defined in section 151(c)(4) if ‘half-time’ were substituted for ‘full-time’ each place it appears in such section.

      ‘(4) DEPENDENT- The term ‘dependent’ has the meaning given such term by section 152.

    ‘(f) SPECIAL RULES-

      ‘(1) DENIAL OF DOUBLE BENEFIT- No deduction shall be allowed under this section for any amount for which a deduction is allowable under any other provision of this chapter.

      ‘(2) CERTAIN RULES TO APPLY- Rules similar to the rules of subsections (d) and (e) of section 32 shall apply for purposes of this section.’

    (b) DEDUCTION ALLOWED WHETHER OR NOT TAXPAYER ITEMIZES OTHER DEDUCTIONS- Subsection (a) of section 62 is amended by inserting after paragraph (16) the following new paragraph:

      ‘(17) INTEREST ON EDUCATION LOANS- The deduction allowed by section 221.’

    (c) REPORTING REQUIREMENT-

      (1) IN GENERAL- Subpart B of part III of subchapter A of chapter 61 (relating to information concerning transactions with other persons) is amended by inserting after section 6050R the following new section:

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

    ‘(a) EDUCATION LOAN INTEREST OF $600 OR MORE- Any person--

      ‘(1) who is engaged in a trade or business, and

      ‘(2) who, in the course of such trade or business, receives from any individual interest aggregating $600 or more for any calendar year on 1 or more qualified education loans,

    shall make the return described in subsection (b) with respect to each individual from whom such interest was received at such time as the Secretary may by regulations prescribe.

    ‘(b) FORM AND MANNER OF RETURNS- A return is described in this subsection if such return--

      ‘(1) is in such form as the Secretary may prescribe,

      ‘(2) contains--

        ‘(A) the name, address, and TIN of the individual from whom the interest described in subsection (a)(2) was received,

        ‘(B) the amount of such interest received for the calendar year, and

        ‘(C) such other information as the Secretary may prescribe.

    ‘(c) APPLICATION TO GOVERNMENTAL UNITS- For purposes of subsection (a)--

      ‘(1) TREATED AS PERSONS- The term ‘person’ includes any governmental unit (and any agency or instrumentality thereof).

      ‘(2) SPECIAL RULES- In the case of a governmental unit or any agency or instrumentality thereof--

        ‘(A) subsection (a) shall be applied without regard to the trade or business requirement contained therein, and

        ‘(B) any return required under subsection (a) shall be made by the officer or employee appropriately designated for the purpose of making such return.

    ‘(d) STATEMENTS TO BE FURNISHED TO INDIVIDUALS WITH RESPECT TO WHOM INFORMATION IS REQUIRED- Every person required to make a return under subsection (a) shall furnish to each individual whose name is required to be set forth in such return a written statement showing--

      ‘(1) the name and address of the person required to make such return and the phone number of the information contract of such person, and

      ‘(2) the aggregate amount of interest described in subsection (a)(2) received by the person required to make such return from the individual to whom the statement is required to be furnished.

    The written statement required under the preceding sentence shall be furnished on or before January 31 of the year following the calendar year for which the return under subsection (a) was required to be made.

    ‘(e) QUALIFIED EDUCATION LOAN DEFINED- For purposes of this section, except as provided in regulations prescribed by the Secretary, the term ‘qualified education loan’ has the meaning given such term by section 221(e)(1).

    ‘(f) RETURNS WHICH WOULD BE REQUIRED TO BE MADE BY 2 OR MORE PERSONS- Except to the extent provided in regulations prescribed by the Secretary, in the case of interest received by any person on behalf of another person, only the person first receiving such interest shall be required to make the return under subsection (a).’.

      (2) ASSESSABLE PENALTIES- Section 6724(d) (relating to definitions) is amended--

        (A) in paragraph (1)(B), by redesignating clauses (x) through (xv) as clauses (xi) through (xvi), respectively, and by inserting after clause (ix) the following new clause:

          ‘(x) section 6050S (relating to returns relating to education loan interest received in trade or business from individuals),’, and

        (B) in paragraph (2), by striking ‘or’ at the end of the next to last subparagraph, by striking the period at the end of the last subparagraph and inserting ‘, or’, and by adding at the end the following new subparagraph:

        ‘(Z) section 6050S(d) (relating to returns relating to education loan interest received in trade or business from individuals).’

    (d) CLERICAL AMENDMENT- The table of sections for part VII of subchapter B of chapter 1 is amended by

striking the last item and inserting the following new items:

‘Sec. 221. Interest on education loans.

‘Sec. 222. Cross reference.’.

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

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

    (a) IN GENERAL- Paragraph (2) of section 72(t) (relating to exceptions to 10-percent additional tax on early distributions from qualified retirement plans) is amended by adding at the end the following new subparagraph:

        ‘(E) DISTRIBUTIONS FROM INDIVIDUAL RETIREMENT PLANS FOR HIGHER EDUCATION EXPENSES- Distributions to an individual from an individual retirement plan to the extent such distributions do not exceed the qualified higher education expenses (as defined in paragraph (7)) of the taxpayer for the taxable year.’

    (b) QUALIFIED HIGHER EDUCATION EXPENSES- Section 72(t) is amended by adding at the end the following new paragraph:

      ‘(7) QUALIFIED HIGHER EDUCATION EXPENSES- For purposes of paragraph (2)(E)--

        ‘(A) IN GENERAL- The term ‘qualified higher education expenses’ means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of the Higher Education Access and Affordability Act of 1997) of--

          ‘(i) the taxpayer,

          ‘(ii) the taxpayer’s spouse, or

          ‘(iii) any child (as defined in section 151(c)(3)), grandchild, or ancestor of the taxpayer or the taxpayer’s spouse,

        at an eligible educational institution (as defined in section 135(c)(3)).

        ‘(B) COORDINATION WITH OTHER PROVISIONS- The amount of qualified higher education expenses for any taxable year shall be reduced by the sum of--

          ‘(i) the amount excluded from gross income under section 135 by reason of such expenses, and

          ‘(ii) the amount of the reduction described in section 135(d)(1).’

    (c) EFFECTIVE DATE- The amendments made by this section shall apply to distributions after the date of the enactment of this Act.

SEC. 6. EDUCATION INVESTMENT ACCOUNTS.

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

‘SEC. 530. EDUCATION INVESTMENT ACCOUNTS.

    ‘(a) GENERAL RULE- An education investment account shall be exempt from taxation under this subtitle. Notwithstanding the preceding sentence, the education investment account shall be subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable organizations).

    ‘(b) LIMITATIONS ON ACCOUNTS-

      ‘(1) ACCOUNT MAY NOT BE ESTABLISHED FOR BENEFIT OF MORE THAN 1 INDIVIDUAL- An education investment account may not be established for the benefit of more than 1 individual.

      ‘(2) SPECIAL RULE WHERE MORE THAN 1 ACCOUNT- If, at any time during a calendar year, 2 or more education investment accounts are maintained for the benefit of an individual, only the account first established shall be treated as an education investment account for purposes of this section. This paragraph shall not apply to the extent more than 1 account exists solely by reason of a rollover contribution.

    ‘(c) DEFINITIONS AND SPECIAL RULES- For purposes of this section--

      ‘(1) EDUCATION INVESTMENT ACCOUNT- The term ‘education investment account’ means a trust created or organized in the United States exclusively for the purpose of paying the qualified higher education expenses of the account holder, but only if the written governing instrument creating the trust meets the following requirements:

        ‘(A) No contribution will be accepted--

          ‘(i) unless it is in cash,

          ‘(ii) except in the case of rollover contributions from another education investment account, in excess of $1,500 for any calendar year, and

          ‘(iii) after the date on which the account holder attains age 18.

        ‘(B) The trustee is a bank (as defined in section 408(n)) or another person who demonstrates to the satisfaction of the Secretary that the manner in which that person will administer the trust will be consistent with the requirements of this section.

        ‘(C) No part of the trust assets will be invested in life insurance contracts.

        ‘(D) The assets of the trust shall not be commingled with other property except in a common trust fund or common investment fund.

        ‘(E) Any balance in the education investment account on the day after the date on which the account holder attains age 30 (or, if earlier, the date on which such holder dies) shall be distributed within 30 days of such date to the account holder (or in the case of death, the beneficiary).

      ‘(2) TIME WHEN CONTRIBUTIONS DEEMED MADE- A taxpayer shall be deemed to have made a contribution on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).

      ‘(3) QUALIFIED HIGHER EDUCATION EXPENSES-

        ‘(A) IN GENERAL- The term ‘qualified higher education expenses’ has the meaning given such term by section 529(e)(3), except that such expenses shall be reduced by--

          ‘(i) the amount excluded from gross income under section 135 by reason of such expenses, and

          ‘(ii) the amount of the reduction described in section 135(d)(1) (other than subparagraph (E)).

        ‘(B) STATE TUITION PLANS- Such term shall include amounts paid or incurred to purchase tuition credits or certificates, or to make contributions to an account, under a qualified State tuition program (as defined in section 529(b)).

      ‘(4) ELIGIBLE EDUCATIONAL INSTITUTION- The term ‘eligible educational institution’ has the meaning given such term by section 135(c)(3).

      ‘(5) ACCOUNT HOLDER- The term ‘account holder’ means the individual for whose benefit the education investment account is established.

    ‘(d) TAX TREATMENT OF DISTRIBUTIONS-

      ‘(1) IN GENERAL- Except as otherwise provided in this subsection, any amount paid or distributed out of an education investment account shall be included in gross income of the payee or distributee for the taxable year in the manner prescribed by section 72. For purposes of the preceding sentence, rules similar to the rules of section 408(d)(2) shall apply.

      ‘(2) DISTRIBUTION USED TO PAY EDUCATIONAL EXPENSES- Paragraph (1) shall not apply to any payment or distribution out of an education investment account to the extent such payment or distribution is used exclusively to pay the qualified higher education expenses of the account holder.

      ‘(3) SPECIAL RULE FOR APPLYING SECTION 2503- If any payment or distribution from an education investment account is used exclusively for the payment to an eligible educational institution of the qualified higher education expenses of the account holder, such payment shall be treated as a qualified transfer for purposes of section 2503(e).

      ‘(4) ADDITIONAL TAX FOR DISTRIBUTIONS NOT USED FOR EDUCATIONAL EXPENSES-

        ‘(A) IN GENERAL- The tax imposed by this chapter for any taxable year on any taxpayer who receives a payment or distribution from an education investment account which is includible in gross income under paragraph (1) shall be increased by 10 percent of the amount which is so includible.

        ‘(B) EXCEPTION FOR DISABILITY, DEATH, OR SCHOLARSHIP- Subparagraph (A) shall not apply if the payment or distribution is--

          ‘(i) made on account of the death or disability of the account holder, or

          ‘(ii) made on account of a scholarship (or allowance or payment described in section 135(d)(1) (B) or (C)) received by the account holder to the extent the amount of the payment or distribution does not exceed the amount of the scholarship, allowance, or payment.

        ‘(C) EXCESS CONTRIBUTIONS RETURNED BEFORE DUE DATE OF RETURN- Subparagraph (A) shall not apply to the distribution to a contributor of any contribution paid during a taxable year to an education investment account to the extent that such contribution, when added to previous contributions to the account during the taxable year, exceeds $1,500 if--

          ‘(i) such distribution is received on or before the day prescribed by law (including extensions of time) for filing such contributor’s return for such taxable year, and

          ‘(ii) such distribution is accompanied by the amount of net income attributable to such excess contribution.

        Any net income described in clause (ii) shall be included in the gross income of the contributor for the taxable year in which such excess contribution was made.

      ‘(5) ROLLOVER CONTRIBUTIONS- Paragraph (1) shall not apply to any amount paid or distributed from an education investment account to the extent that the amount received is paid into another education investment account for the benefit of the account holder not later than the 60th day after the day on which the holder receives the payment or distribution. The preceding sentence shall not apply to

any payment or distribution if it applied to any prior payment or distribution during the 12-month period ending on the date of the payment or distribution.

      ‘(6) SPECIAL RULES FOR DEATH AND DIVORCE- Rules similar to the rules of section 220(f) (7) and (8) shall apply.

    ‘(e) TAX TREATMENT OF ACCOUNTS- Rules similar to the rules of paragraphs (2) and (4) of section 408(e) shall apply to any education investment account, and any amount treated as distributed under such rules shall be treated as not used to pay qualified higher education expenses.

    ‘(f) COMMUNITY PROPERTY LAWS- This section shall be applied without regard to any community property laws.

    ‘(g) CUSTODIAL ACCOUNTS- For purposes of this section, a custodial account shall be treated as a trust if the assets of such account are held by a bank (as defined in section 408(n)) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which he will administer the account will be consistent with the requirements of this section, and if the custodial account would, except for the fact that it is not a trust, constitute an account described in subsection (b)(1). For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof.

    ‘(h) REPORTS- The trustee of an education investment account shall make such reports regarding such account to the Secretary and to the account holder with respect to contributions, distributions, and such other matters as the Secretary may require under regulations. The reports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by those regulations.’

    (b) TAX ON PROHIBITED TRANSACTIONS- Section 4975 (relating to prohibited transactions) is amended--

      (1) by adding at the end of subsection (c) the following new paragraph:

      ‘(5) SPECIAL RULE FOR EDUCATION INVESTMENT ACCOUNTS- An individual for whose benefit an education investment account is established and any contributor to such account shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if, with respect to such transaction, the account ceases to be an education investment account by reason of the application of section 530 to such account.’; and

      (2) in subsection (e)(1), by striking ‘or’ at the end of subparagraph (D), by redesignating subparagraph (E) as subparagraph (F), and by inserting after subparagraph (D) the following new subparagraph:

        ‘(E) an education investment account described in section 530, or’.

    (c) FAILURE TO PROVIDE REPORTS ON EDUCATION INVESTMENT ACCOUNTS- Section 6693 (relating to failure to provide reports on individual retirement accounts or annuities) is amended--

      (1) by striking ‘individual retirement’ and inserting ‘certain tax-favored’ in the heading of such section, and

      (2) in subsection (a)(2), by striking ‘and’ at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting ‘, and’, and by adding at the end the following new subparagraph:

        ‘(C) section 530(h) (relating to education investment accounts).’

    (d) COORDINATION WITH SAVINGS BOND EXCLUSION- Section 135(d)(1) is amended by striking ‘or’ at the end of subparagraph (C), by striking the period at the end of subparagraph (D) and inserting ‘, or’ , and by adding at the end the following new subparagraph:

        ‘(E) a payment or distribution from an education investment account (as defined in section 530).’

    (e) CLERICAL AMENDMENTS-

      (1) The table of sections for part VIII of subchapter F of chapter 1 is amended by adding at the end the following new item:

‘Sec. 530. Education investment accounts.’

      (2)(A) The heading for part VIII of subchapter F of chapter 1 is amended to read as follows:

‘PART VIII--HIGHER EDUCATION SAVINGS ENTITIES’.

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

‘Part VIII. Higher education savings entities.’

      (3) The item relating to section 6693 in the table of sections for subchapter B of chapter 68 is amended by striking ‘individual retirement’ and inserting ‘certain tax-favored’.

    (f) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1996.