[House Report 106-546]
[From the U.S. Government Publishing Office]
106th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 106-546
======================================================================
EDUCATION SAVINGS AND SCHOOL EXCELLENCE ACT OF 2000
_______
March 24, 2000.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Archer, from the Committee on Ways and Means, submitted the
following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 7]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 7) to amend the Internal Revenue Code of 1986 to
allow tax-free expenditures from education individual
retirement accounts for elementary and secondary school
expenses, to increase the maximum annual amount of
contributions to such accounts, and for other purposes, having
considered the same, report favorably thereon with an amendment
and recommend that the bill as amended do pass.
CONTENTS
Page
I. Summary and Background............................................9
A. Purpose and Summary................................. 9
B. Background and Need for Legislation................. 10
C. Legislative History................................. 10
II. Explanation of the Bill..........................................11
A. Expand Education Savings Accounts................... 11
B. Allow Tax-Free Distributions From State and Private
Education Programs................................. 16
C. Eliminate Tax on Awards under the National Health
Service Corps Scholarship Program, the F. Edward
Hebert Armed Forces Health Professions Scholarship
and Financial Assistance Program, the National
Institutes of Health Undergraduate Scholarship
Program, and Certain State-Sponsored Scholarship
Programs........................................... 19
D. Liberalize Tax-Exempt Bond Arbitrage Rebate
Exceptions for Public School Construction Bonds.... 20
E. Student Loan Interest Deduction..................... 22
F. Two-Percent Floor Not to Apply to Professional
Development Expenses of Teachers................... 24
G. Extension of Deduction for Computer Donations to
Schools............................................ 24
III.Vote of the Committee............................................26
IV. Budget Effects of the Bill.......................................26
A. Committee Estimates of Budgetary Effects............ 26
B. Statement Regarding New Budget Authority and Tax
Expenditures....................................... 29
C. Cost Estimate Prepared by the Congressional Budget
Office............................................. 29
V. Other Matters To Be Discussed Under the Rules of the House.......30
A. Committee Oversight Findings and Recommendations.... 30
B. Summary of Findings and Recommendations of the
Committee on Government Reform and Oversight....... 31
C. Constitutional Authority Statement.................. 31
D. Information Relating to Unfunded Mandates........... 31
E. Applicability of House Rule XXI5(b)................. 31
F. Tax Complexity Analysis............................. 31
VI. Changes in Existing Law Made by the Bill, as Reported............32
VII. Dissenting Views................................................52
The amendment is as follows:
Strike out all after the enacting clause and insert in lieu
thereof the following:
SECTION 1. SHORT TITLE; ETC.
(a) Short Title.--This Act may be cited as the ``Education Savings
and School Excellence Act of 2000''.
(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 TO EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.
(a) Maximum Annual Contributions.--
(1) In general.--Section 530(b)(1)(A)(iii) (defining
education individual retirement account) is amended by striking
``$500'' and inserting ``$2,000''.
(2) Conforming amendment.--Section 4973(e)(1)(A) is amended
by striking ``$500'' and inserting ``$2,000''.
(b) Tax-Free Expenditures for Elementary and Secondary School
Expenses.--
(1) In general.--Section 530(b)(2) (defining qualified higher
education expenses) is amended to read as follows:
``(2) Qualified education expenses.--
``(A) In general.--The term `qualified education
expenses' means--
``(i) qualified higher education expenses (as
defined in section 529(e)(3)), and
``(ii) qualified elementary and secondary
education expenses (as defined in paragraph
(4)).
``(B) Qualified state tuition programs.--Such term
shall include any contribution to a qualified State
tuition program (as defined in section 529(b)) on
behalf of the designated beneficiary (as defined in
section 529(e)(1)); but there shall be no increase in
the investment in the contract for purposes of applying
section 72 by reason of any portion of such
contribution which is not includible in gross income by
reason of subsection (d)(2).''.
(2) Qualified elementary and secondary education expenses.--
Section 530(b) (relating to definitions and special rules) is
amended by adding at the end the following new paragraph:
``(4) Qualified elementary and secondary education
expenses.--
``(A) In general.--The term `qualified elementary and
secondary education expenses' means--
``(i) expenses for tuition, fees, academic
tutoring, special needs services, books,
supplies, computer equipment (including related
software and services), and other equipment
which are incurred in connection with the
enrollment or attendance of the designated
beneficiary of the trust as an elementary or
secondary school student at a public, private,
or religious school, and
``(ii) expenses for room and board, uniforms,
transportation, and supplementary items and
services (including extended day programs)
which are required or provided by a public,
private, or religious school in connection with
such enrollment or attendance.
``(B) Special rule for homeschooling.--Such term
shall include expenses described in subparagraph (A)(i)
in connection with education provided by homeschooling
if the requirements of any applicable State or local
law are met with respect to such education.
``(C) School.--The term `school' means any school
which provides elementary education or secondary
education (kindergarten through grade 12), as
determined under State law.''.
(3) Conforming amendments.--Section 530 is amended--
(A) by striking ``higher'' each place it appears in
subsections (b)(1) and (d)(2), and
(B) by striking ``higher'' in the heading for
subsection (d)(2).
(c) Waiver of Age Limitations for Children With Special Needs.--
Section 530(b)(1) (defining education individual retirement account) is
amended by adding at the end the following flush sentence:
``The age limitations in subparagraphs (A)(ii) and (E) and
paragraphs (5) and (6) of subsection (d) shall not apply to any
designated beneficiary with special needs (as determined under
regulations prescribed by the Secretary).''.
(d) Entities Permitted To Contribute to Accounts.--Section 530(c)(1)
(relating to reduction in permitted contributions based on adjusted
gross income) is amended by striking ``The maximum amount which a
contributor'' and inserting ``In the case of a contributor who is an
individual, the maximum amount the contributor''.
(e) Time When Contributions Deemed Made.--
(1) In general.--Section 530(b) (relating to definitions and
special rules), as amended by subsection (b)(2), is amended by
adding at the end the following new paragraph:
``(5) Time when contributions deemed made.--An individual
shall be deemed to have made a contribution to an education
individual retirement account 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).''.
(2) Extension of time to return excess contributions.--
Subparagraph (C) of section 530(d)(4) (relating to additional
tax for distributions not used for educational expenses) is
amended--
(A) by striking clause (i) and inserting the
following new clause:
``(i) such distribution is made before the
first day of the sixth month of the taxable
year following the taxable year, and'', and
(B) by striking ``due date of return'' in the heading
and inserting ``certain date''.
(f) Coordination With Hope and Lifetime Learning Credits and
Qualified Tuition Programs.--
(1) In general.--Section 530(d)(2)(C) is amended to read as
follows:
``(C) Coordination with hope and lifetime learning
credits and qualified tuition programs.--For purposes
of subparagraph (A)--
``(i) Credit coordination.--The total amount
of qualified higher education expenses with
respect to an individual for the taxable year
shall be reduced--
``(I) as provided in section
25A(g)(2), and
``(II) by the amount of such expenses
which were taken into account in
determining the credit allowed to the
taxpayer or any other person under
section 25A.
``(ii) Coordination with qualified tuition
programs.--If, with respect to an individual
for any taxable year--
``(I) the aggregate distributions
during such year to which subparagraph
(A) and section 529(c)(3)(B) apply,
exceed
``(II) the total amount of qualified
education expenses (after the
application of clause (i)) for such
year,
the taxpayer shall allocate such expenses among
such distributions for purposes of determining
the amount of the exclusion under subparagraph
(A) and section 529(c)(3)(B).''.
(2) Conforming amendments.--
(A) Subsection (e) of section 25A is amended to read
as follows:
``(e) Election Not To Have Section Apply.--A taxpayer may elect not
to have this section apply with respect to the qualified tuition and
related expenses of an individual for any taxable year.''.
(B) Section 135(d)(2)(A) is amended by striking
``allowable'' and inserting ``allowed''.
(C) Section 530(d)(2)(D) is amended--
(i) by striking ``or credit'', and
(ii) by striking ``credit or'' in the
heading.
(D) Section 4973(e)(1) is amended by adding ``and''
at the end of subparagraph (A), by striking
subparagraph (B), and by redesignating subparagraph (C)
as subparagraph (B).
(g) Renaming Education Individual Retirement Accounts as Education
Savings Accounts.--
(1) In general.--
(A) Section 530 (as amended by the preceding
provisions of this section) is amended by striking
``education individual retirement account'' each place
it appears and inserting ``education savings account''.
(B) The heading for paragraph (1) of section 530(b)
is amended by striking ``Education individual
retirement account'' and inserting ``Education savings
account''.
(C) The heading for section 530 is amended to read as
follows:
``SEC. 530. EDUCATION SAVINGS ACCOUNTS.''.
(D) The item in the table of contents for part VII of
subchapter F of chapter 1 relating to section 530 is
amended to read as follows:
``Sec. 530. Education savings
accounts.''.
(2) Conforming amendments.--
(A) The following provisions are each amended by
striking ``education individual retirement'' each place
it appears and inserting ``education savings'':
(i) Section 25A(e)(2).
(ii) Section 26(b)(2)(E).
(iii) Section 72(e)(9).
(iv) Section 135(c)(2)(C).
(v) Subsections (a) and (e) of section 4973.
(vi) Subsections (c) and (e) of section 4975.
(vii) Section 6693(a)(2)(D).
(B) The headings for each of the following provisions
are amended by striking ``education individual
retirement accounts'' each place it appears and
inserting ``education savings accounts''.
(i) Section 72(e)(9).
(ii) Section 135(c)(2)(C).
(iii) Section 4973(e).
(iv) Section 4975(c)(5).
(h) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years
beginning after December 31, 2000.
(2) Subsection (g).--The amendments made by subsection (g)
shall take effect on the date of the enactment of this Act.
SEC. 3. MODIFICATIONS TO QUALIFIED TUITION PROGRAMS.
(a) Short Title.--This section may be cited as the ``Collegiate
Learning and Student Savings (CLASS) Act''.
(b) Eligible Educational Institutions Permitted To Maintain Qualified
Tuition Programs.--
(1) In general.--Section 529(b)(1) (defining qualified State
tuition program) is amended by inserting ``or by one or more
eligible educational institutions'' after ``maintained by a
State or agency or instrumentality thereof ''.
(2) Private qualified tuition programs limited to benefit
plans.--Clause (ii) of section 529(b)(1)(A) is amended by
inserting ``in the case of a program established and maintained
by a State or agency or instrumentality thereof,'' before ``may
make''.
(3) Conforming amendments.--
(A) Sections 72(e)(9), 135(c)(2)(C), 135(d)(1)(D),
529, 530(b)(2)(B), 4973(e), and 6693(a)(2)(C) are each
amended by striking ``qualified State tuition'' each
place it appears and inserting ``qualified tuition''.
(B) The headings for sections 72(e)(9) and
135(c)(2)(C) are each amended by striking ``qualified
state tuition'' and inserting ``qualified tuition''.
(C) The headings for sections 529(b) and 530(b)(2)(B)
are each amended by striking ``Qualified state
tuition'' and inserting ``Qualified tuition''.
(D) The heading for section 529 is amended by
striking ``STATE''.
(E) The item relating to section 529 in the table of
sections for part VIII of subchapter F of chapter 1 is
amended by striking ``State''.
(c) Exclusion From Gross Income of Education Distributions From
Qualified Tuition Programs.--
(1) In general.--Section 529(c)(3)(B) (relating to
distributions) is amended to read as follows:
``(B) Distributions for qualified higher education
expenses.--For purposes of this paragraph--
``(i) In-kind distributions.--No amount shall
be includible in gross income under
subparagraph (A) by reason of a distribution
which consists of providing a benefit to the
distributee which, if paid for by the
distributee, would constitute payment of a
qualified higher education expense.
``(ii) Cash distributions.--In the case of
distributions not described in clause (i), if--
``(I) such distributions do not
exceed the qualified higher education
expenses (reduced by expenses described
in clause (i)), no amount shall be
includible in gross income, and
``(II) in any other case, the amount
otherwise includible in gross income
shall be reduced by an amount which
bears the same ratio to such amount as
such expenses bear to such
distributions.
``(iii) Treatment as distributions.--Any
benefit furnished to a designated beneficiary
under a qualified tuition program shall be
treated as a distribution to the beneficiary
for purposes of this paragraph.
``(iv) Coordination with hope and lifetime
learning credits.--The total amount of
qualified higher education expenses with
respect to an individual for the taxable year
shall be reduced--
``(I) as provided in section
25A(g)(2), and
``(II) by the amount of such expenses
which were taken into account in
determining the credit allowed to the
taxpayer or any other person under
section 25A.
``(v) Coordination with education individual
retirement accounts.--If, with respect to an
individual for any taxable year--
``(I) the aggregate distributions to
which clauses (i) and (ii) and section
530(d)(2)(A) apply, exceed
``(II) the total amount of qualified
higher education expenses otherwise
taken into account under clauses (i)
and (ii) (after the application of
clause (iv)) for such year,
the taxpayer shall allocate such expenses among
such distributions for purposes of determining
the amount of the exclusion under clauses (i)
and (ii) and section 530(d)(2)(A).''.
(2) Conforming amendments.--
(A) Section 135(d)(2)(B) is amended by striking ``the
exclusion under section 530(d)(2)'' and inserting ``the
exclusions under sections 529(c)(3)(B)(i) and
530(d)(2)''.
(B) Section 221(e)(2)(A) is amended by inserting
``529,'' after ``135,''.
(d) Rollover to Different Program for Benefit of Same Designated
Beneficiary.--Section 529(c)(3)(C) (relating to change in
beneficiaries) is amended--
(1) by striking ``transferred to the credit'' in clause (i)
and inserting ``transferred--
``(I) to another qualified tuition
program for the benefit of the
designated beneficiary, or
``(II) to the credit'',
(2) by adding at the end the following new clause:
``(iii) Limitation on certain rollovers.--
Clause (i)(I) shall not apply to any amount
transferred with respect to a designated
beneficiary if, at any time during the 1-year
period ending on the day of such transfer, any
other amount was transferred with respect to
such beneficiary which was not includible in
gross income by reason of clause (i)(I).'', and
(3) by inserting ``or programs'' after ``beneficiaries'' in
the heading.
(e) Member of Family Includes First Cousin.--Section 529(e)(2)
(defining member of family) is amended by striking ``and'' at the end
of subparagraph (B), by striking the period at the end of subparagraph
(C) and by inserting ``; and'', and by adding at the end the following
new subparagraph:
``(D) any first cousin of such beneficiary.''.
(f) Definition of Qualified Higher Education Expenses.--
(1) In general.--Subparagraph (A) of section 529(e)(3)
(relating to definition of qualified higher education expenses)
is amended to read as follows:
``(A) In general.--The term `qualified higher
education expenses' means--
``(i) tuition and fees required for the
enrollment or attendance of a designated
beneficiary at an eligible educational
institution for courses of instruction of such
beneficiary at such institution, and
``(ii) expenses for books, supplies, and
equipment which are incurred in connection with
such enrollment or attendance, but not to
exceed the allowance for books and supplies
included in 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
date of the enactment of the Education Savings
and School Excellence Act of 2000 as determined
by the eligible educational institution.''.
(2) Exception for education involving sports, etc.--Paragraph
(3) of section 529(e) (relating to qualified higher education
expenses) is amended by adding at the end the following new
subparagraph:
``(C) Exception for education involving sports,
etc.--The term `qualified higher education expenses'
shall not include expenses with respect to any course
or other education involving sports, games, or hobbies
unless such course or other education is part of the
beneficiary's degree program or is taken to acquire or
improve job skills of the beneficiary.''.
(g) Effective Dates.--
(1) In general.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2000.
(2) Qualified higher education expenses.--The amendments made
by subsection (f) shall apply to amounts paid for courses
beginning after December 31, 2000.
SEC. 4. EXCLUSION OF CERTAIN AMOUNTS RECEIVED UNDER THE NATIONAL HEALTH
SERVICE CORPS SCHOLARSHIP PROGRAM, THE F. EDWARD
HEBERT ARMED FORCES HEALTH PROFESSIONS SCHOLARSHIP
AND FINANCIAL ASSISTANCE PROGRAM, AND CERTAIN OTHER
PROGRAMS.
(a) In General.--Section 117(c) (relating to the exclusion from gross
income amounts received as a qualified scholarship) is amended--
(1) by striking ``Subsections (a)'' and inserting the
following:
``(1) In general.--Except as provided in paragraph (2),
subsections (a)'', and
(2) by adding at the end the following new paragraph:
``(2) Exceptions.--Paragraph (1) shall not apply to any
amount received by an individual under--
``(A) the National Health Service Corps Scholarship
program under section 338A(g)(1)(A) of the Public
Health Service Act,
``(B) the Armed Forces Health Professions Scholarship
and Financial Assistance program under subchapter I of
chapter 105 of title 10, United States Code,
``(C) the National Institutes of Health Undergraduate
Scholarship program under section 487D of the Public
Health Service Act, or
``(D) any State program determined by the Secretary
to have substantially similar objectives as such
programs.''.
(b) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by subsection (a) shall apply to amounts
received in taxable years beginning after December 31, 1993.
(2) State programs.--Section 117(c)(2)(D) of the Internal
Revenue Code of 1986 (as added by the amendments made by
subsection (a)) shall apply to amounts received in taxable
years beginning after December 31, 1999.
SEC. 5. ADDITIONAL INCREASE IN ARBITRAGE REBATE EXCEPTION FOR
GOVERNMENTAL BONDS USED TO FINANCE EDUCATIONAL
FACILITIES.
(a) In General.--Section 148(f)(4)(D)(vii) (relating to increase in
exception for bonds financing public school capital expenditures) is
amended by striking ``$5,000,000'' the second place it appears and
inserting ``$10,000,000''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to obligations issued in calendar years beginning after December 31,
2000.
SEC. 6. MODIFICATION OF ARBITRAGE REBATE RULES APPLICABLE TO PUBLIC
SCHOOL CONSTRUCTION BONDS.
(a) In General.--Subparagraph (C) of section 148(f)(4) is amended by
adding at the end the following new clause:
``(xviii) 4-year spending requirement for
public school construction issue.--
``(I) In general.--In the case of a
public school construction issue, the
spending requirements of clause (ii)
shall be treated as met if at least 10
percent of the available construction
proceeds of the construction issue are
spent for the governmental purposes of
the issue within the 1-year period
beginning on the date the bonds are
issued, 30 percent of such proceeds are
spent for such purposes within the 2-
year period beginning on such date, 60
percent of such proceeds are spent for
such purposes within the 3-year period
beginning on such date, and 100 percent
of such proceeds are spent for such
purposes within the 4-year period
beginning on such date.
``(II) Public school construction
issue.--For purposes of this clause,
the term `public school construction
issue' means any construction issue if
no bond which is part of such issue is
a private activity bond and all of the
available construction proceeds of such
issue are to be used for the
construction (as defined in clause
(iv)) of public school facilities to
provide education or training below the
postsecondary level or for the
acquisition of land that is
functionally related and subordinate to
such facilities.
``(III) Other rules to apply.--Rules
similar to the rules of the preceding
provisions of this subparagraph which
apply to clause (ii) also apply to this
clause.''.
(b) Effective Date.--The amendment made by this section shall apply
to obligations issued after December 31, 2000.
SEC. 7. ELIMINATION OF 60-MONTH LIMIT AND INCREASE IN INCOME LIMITATION
ON STUDENT LOAN INTEREST DEDUCTION.
(a) Elimination of 60-Month Limit.--
(1) In general.--Section 221 (relating to interest on
education loans) is amended by striking subsection (d) and by
redesignating subsections (e), (f), and (g) as subsections (d),
(e), and (f), respectively.
(2) Conforming amendment.--Section 6050S(e) is amended by
striking ``section 221(e)(1)'' and inserting ``section
221(d)(1)''.
(3) Effective date.--The amendments made by this subsection
shall apply with respect to any loan interest paid after
December 31, 2000, in taxable years ending after such date.
(b) Increase in Income Limitation.--
(1) In general.--Section 221(b)(2)(B) (relating to amount of
reduction) is amended by striking clauses (i) and (ii) and
inserting the following:
``(i) the excess of--
``(I) the taxpayer's modified
adjusted gross income for such taxable
year, over
``(II) $45,000 ($90,000 in the case
of a joint return), bears to
``(ii) $15,000.''.
(2) Conforming amendment.--Section 221(g)(1) is amended by
striking ``$40,000 and $60,000 amounts'' and inserting
``$45,000 and $90,000 amounts''.
(3) Effective date.--The amendments made by this subsection
shall apply to taxable years ending after December 31, 2000.
SEC. 8. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS NOT TO
APPLY TO QUALIFIED PROFESSIONAL DEVELOPMENT
EXPENSES OF ELEMENTARY AND SECONDARY SCHOOL
TEACHERS.
(a) In General.--Section 67(b) (defining miscellaneous itemized
deductions) is amended by striking ``and'' at the end of paragraph
(11), by striking the period at the end of paragraph (12) and inserting
``, and'', and by adding at the end the following new paragraph:
``(13) any deduction allowable for the qualified professional
development expenses of an eligible teacher.''.
(b) Definitions.--Section 67 (relating to 2-percent floor on
miscellaneous itemized deductions) is amended by adding at the end the
following new subsection:
``(g) Qualified Professional Development Expenses of Eligible
Teachers.--For purposes of subsection (b)(13)--
``(1) Qualified professional development expenses.--
``(A) In general.--The term `qualified professional
development expenses' means expenses in an amount not
to exceed $1,000 for any taxable year--
``(i) for tuition, fees, books, supplies,
equipment, and transportation required for the
enrollment or attendance of an individual in a
qualified course of instruction, and
``(ii) with respect to which a deduction is
allowable under section 162 (determined without
regard to this section).
``(B) Qualified course of instruction.--The term
`qualified course of instruction' means a course of
instruction which--
``(i) is--
``(I) at an institution of higher
education (as defined 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 subsection),
or
``(II) a professional conference, and
``(ii) is part of a program of professional
development which is approved and certified by
the appropriate local educational agency as
furthering the individual's teaching skills.
``(C) Local educational agency.--The term `local educational
agency' has the meaning given such term by section 14101 of the
Elementary and Secondary Education Act of 1965, as so in
effect.
``(2) Eligible teacher.--
``(A) In general.--The term `eligible teacher' means
an individual who is a kindergarten through grade 12
classroom teacher, instructor, counselor, aide, or
principal in an elementary or secondary school.
``(B) Elementary or secondary school.--The terms
`elementary school' and `secondary school' have the
meanings given such terms by section 14101 of the
Elementary and Secondary Education Act of 1965 (20
U.S.C. 8801), as so in effect.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2000.
SEC. 9. EXTENSION OF SPECIAL RULE FOR CHARITABLE CONTRIBUTIONS OF
COMPUTER TECHNOLOGY AND EQUIPMENT FOR ELEMENTARY
AND SECONDARY SCHOOL PURPOSES.
Subparagraph (F) of section 170(e)(6) (relating to termination) is
amended by striking ``2000'' and inserting ``2001''.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
H.R. 7, as amended, expands and modifies the education IRAs
enacted in the Taxpayer Relief Act of 1997 (``1997 Act'') to
include elementary and secondary education expenses and provide
other tax incentives for education.
Expand Education Savings Accounts.--The bill increases the
annual contribution limit to education IRAs (renamed
``Education Savings Accounts'') from $500 to $2,000 per
beneficiary, and expands the definition of qualified education
expenses to include qualified elementary and secondary expenses
(including certain homeschooling expenses). Further, the bill
allows contributions to be made on behalf of special needs
beneficiaries after they reach age 18. The bill also allows:
(1) contributions for a taxable year to be made until April 15
of the following year; (2) coordination of distributions from
Education Savings Accounts with the HOPE and Lifetime Learning
credits; and (3) contributions by corporations and other
entities. The provisions are effective for taxable years
beginning after December 31, 2000.
Allow tax-free distributions from state and private
education programs.--The bill expands the definition of
``qualified tuition program'' to include certain prepaid
tuition programs established and maintained by one or more
eligible educational institutions (which may be private
institutions). In the case of a qualified tuition program
maintained by one or more private educational institutions,
persons will be able to purchase tuition credits or
certificates on behalf of a designated beneficiary, but will
not be able to make contributions to a savings account plan.
Under the bill, an exclusion from gross income is provided for
distributions made from qualified tuition programs. The bill
allows a taxpayer to claim a HOPE credit or Lifetime Learning
credit for a taxable year and to exclude from gross income
amounts distributed from a qualified tuition program on behalf
of the same student as long as the distributions are not used
for the same expenses for which a credit was claimed. The
provisions are effective for taxable years beginning after
December 31, 2000.
Eliminate tax on awards Under National Health Service Corps
(``NHSC'') Scholarship Program, F. Edward Hebert Armed Forces
Health Professions Scholarship and Financial Assistance
Program, National Institutes of Health (``NIH'') Undergraduate
Scholarship Program and Certain State-Sponsored Scholarship
Programs.--The bill provides that amounts received by an
individual under certain programs are excludable from income as
qualified scholarships under section 117, without regard to any
service obligation by the recipient. The provision is effective
for education awards received under the NHSC Scholarship
Program, the F. Edward Hebert Armed Forces Scholarship Program,
and the NIH Undergraduate Scholarship Program after December
31, 1993. The provision is effective for awards received under
State-sponsored programs designated by the Secretary after
December 31, 1999.
Liberalize tax-exempt financing rules for public school
construction.--The bill increases from $10 million to $15
million the maximum annual issuance of governmental bonds by
small State or local governments eligible for a special
exception from the tax-exempt bond arbitrage rebate rules. The
increase applies only with respect to bonds issued for public
school construction. The provision is effective obligations
issued in calendar years beginning after December 31, 2000.
The bill extends from 24 months to 48 months the period
during which proceeds of tax-exempt bonds to finance public
school construction may be spent without losing eligibility for
an exception from the tax-exempt bond arbitrage rebate rules.
The provision is effective for bonds issued after December 31,
2000.
Student loan interest deduction.--The bill increases the
beginning point of the income phaseout for the student loan
interest deduction for individual taxpayers from $40,000 to
$45,000. For taxpayers filing joint returns, the bill increases
the beginning point of the income phaseout to twice the
beginning point of the income phaseouts applicable to single
taxpayers. The bill also repeals both the limit on the number
of months during which interest paid on a qualified education
loan is deductible and the restriction that nonmandatory
payments of interest are not deductible. The provisions
generally are effective for taxable years beginning after
December 31, 2000.
Two-percent floor not to apply to professional development
expenses of teachers.--The bill provides an exception to the
two-percent floor on itemized deductions for the professional
development expenses (not to exceed $1,000) of elementary and
secondary school teachers. The provision is effective for
taxable years beginning after December 31, 2000.
Extension of deduction for computer donations to schools.--
The bill extends for one year, through December 31, 2001, the
enhanced deduction for computer donations to schools under
section 170(e)(6).
B. Background and Need for Legislation
The bill, as amended, expands the opportunity for use of
education savings accounts to include elementary and secondary
school expenses and increases the amount that may be
contributed to such accounts. The bill, as amended, also
expands the tax incentives for education by modifying the rules
relating to qualified tuition programs, the coordination of the
HOPE and Lifetime Learning credit with education savings
accounts and qualified tuition programs, the tax treatment of
certain scholarship programs, school construction bonds, the
student loan interest deduction, deductibility of teachers'
professional development expenses, and the enhanced charitable
deduction for computer equipment.
C. Legislative History
H.R. 7 was introduced by Mr. Hulshof and Mr. Lipinski on
March 1, 1999, and was amended by the Committee in a markup on
March 22, 2000. An amendment in the nature of a substitute
(offered by Chairman Archer) was adopted by a voice vote, with
a quorum present. The bill, as amended, was ordered favorably
reported by a roll call of 21 yeas and 16 nays on March 22,
2000, with a quorum present.
II. EXPLANATION OF THE BILL
A. Expand Education Savings Accounts (Sec. 2 of the Bill and Sec. 530
of the Code)
Present Law
In general
Section 530 provides tax-exempt status to education
individual retirement accounts (``education IRAs''), meaning
certain trusts (or custodial accounts) which are created or
organized in the United States exclusively for the purpose of
paying the qualified higher education expenses of a named
beneficiary.\1\ Contributions to education IRAs may be made
only in cash. Annual contributions to education IRAs may not
exceed $500 per designated beneficiary (except in cases
involving certain tax-free rollovers, as described below), and
may not be made after the designated beneficiary reaches age
18.\2\ Moreover, an excise tax is imposed if a contribution is
made by any person to an education IRA established on behalf of
a beneficiary during any taxable year in which any
contributions are made by anyone to a qualified State tuition
program (defined under sec. 529) on behalf of the same
beneficiary.
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\1\ Education IRAs generally are not subject to Federal income tax,
but are subject to the unrelated business income tax (``UBIT'') imposed
by section 511.
\2\ An excise tax may be imposed under present law to the extent
that excess contributions above the $500 annual limit are made to an
education IRA.
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Phaseout of contribution limit
The $500 annual contribution limit for education IRAs is
phased out ratably for contributors with modified adjusted
gross income (``AGI'') between $95,000 and $110,000 (between
$150,000 and $160,000 for joint returns). Individuals with
modified AGI above the phase-out range are not allowed to make
contributions to an education IRA established on behalf of any
individual.
Treatment of distributions
Amounts distributed from an education IRA are excludable
from gross income to the extent that the amounts distributed do
not exceed qualified higher education expenses of the
designated beneficiary incurred during the year the
distribution is made (provided that a HOPE credit or Lifetime
Learning credit is not claimed with respect to the beneficiary
for the same taxable year). Distributions from an education IRA
are generally deemed to consist of distributions of principal
(which, under all circumstances, are excludable from gross
income) and earnings (which may be excludable from gross
income) by applying the ratio that the aggregate amount of
contributions to the account for the beneficiary bears to the
total balance of the account. If the qualified higher education
expenses of the student for the year are at least equal to the
total amount of the distribution (i.e., principal and earnings
combined) from an education IRA, then the earnings in their
entirety are excludable from gross income. If, on the other
hand, the qualified higher education expenses of the student
for the year are less than the total amount of the distribution
(i.e., principal and earnings combined) from an education IRA,
then the qualified higher education expenses are deemed to be
paid from a pro-rata share of both the principal and earnings
components of the distribution. Thus, in such a case, only a
portion of the earnings are excludable (i.e., a portion of the
earnings based on the ratio that the qualified higher education
expenses bear to the total amount of the distribution) and the
remaining portion of the earnings is includible in the
distributee's gross income.
To the extent that a distribution exceeds qualified higher
education expenses of the designated beneficiary, an additional
10-percent tax is imposed on the earnings portion of such
excess distribution, unless such distribution is made on
account of the death or disability of, or scholarship received
by, the designated beneficiary. The additional 10-percent tax
also does not apply to the distribution of any contribution to
an education IRA made during the taxable year if such
distribution is made on or before the date that a return is
required to be filed (including extensions of time) by the
beneficiary for the taxable year during which the contribution
was made (or, if the beneficiary is not required to file such a
return, April 15th of the year following the taxable year
during which the contribution was made), provided that such
distribution is accompanied by the amount of income allocable
to the contribution.
Present law allows tax-free transfers or rollovers of
account balances from one education IRA benefitting one
beneficiary to another education IRA benefitting another
beneficiary (as well as redesignations of the named
beneficiary), provided that the new beneficiary is a member of
the family of the old beneficiary. For this purpose, a ``member
of the family'' means persons described in paragraphs (1)
through (8) of section 152(a)--e.g., sons, daughters, brothers,
sisters, nephews and nieces, certain in-laws--and any spouse of
such persons or of the original beneficiary.
Any balance remaining in an education IRA is deemed to be
distributed within 30 days after the date that the named
beneficiary reaches age 30 (or, if earlier, within 30 days of
the date that the beneficiary dies).
Qualified higher education expenses
The term ``qualified higher education expenses'' includes
tuition, fees, books, supplies, and equipment required for the
enrollment or attendance of the designated beneficiary at an
eligible education institution, regardless of whether the
beneficiary is enrolled at an eligible educational institution
on a full-time, half-time, or less than half-time basis.
Moreover, the term ``qualified higher education expenses''
includes certain room and board expenses for any period during
which the beneficiary is at least a half-time student.
Qualified higher education expensesinclude expenses with
respect to undergraduate or graduate-level courses. In addition,
qualified higher education expenses include amounts paid or incurred to
purchase tuition credits (or to make contributions to an account) under
a qualified State tuition program, as defined in section 529, for the
benefit of the beneficiary of the education IRA.
Qualified higher education expenses generally include only
out-of-pocket expenses. Such qualified higher education
expenses do not include expenses covered by educational
assistance for the benefit of the beneficiary that is
excludable from gross income. Thus, total qualified higher
education expenses are reduced by scholarship or fellowship
grants excludable from gross income under present-law section
117, as well as any other tax-free educational benefits, such
as employer-provided educational assistance that is excludable
from the employee's gross income under section 127.\3\
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\3\ No reduction of qualified higher education expenses is
required, however, for a gift, bequest, devise, or inheritance.
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Present law also provides that, if any qualified higher
education expenses are taken into account in determining the
amount of the exclusion for a distribution from an education
IRA, then no deduction (e.g., for trade or business expenses
deductible under sec. 162), or exclusion (e.g., for expenses
paid with interest on education savings bonds excludable under
sec. 135), or credit is allowed with respect to such expenses.
Eligible educational institution
Eligible educational institutions are defined by reference
to section 481 of the Higher Education Act of 1965. Such
institutions generally are accredited post-secondary
educational institutions offering credit toward a bachelor's
degree, an associate's degree, a graduate-level or professional
degree, or another recognized post-secondary credential.
Certain proprietary institutions and post-secondary vocational
institutions also are eligible institutions. The institution
must be eligible to participate in Department of Education
student aid programs.
Reasons for Change
The Committee believes that the present-law rules governing
education IRAs should be expanded to provide a greater
incentive for families (and other persons) to save for
educational purposes, including for expenses related to
elementary and secondary school education. The Committee also
believes that more flexible rules are needed for education IRAs
(e.g., for education IRAs established for the benefit of
special needs students). The Committee further believes that
the benefits of education IRAs should be coordinated with other
education tax provisions so as to maximize the potential
benefit of all the education tax incentives.
Explanation of Provision
Annual contribution limit
The bill increases the annual education IRA contribution
limit to $2,000. Thus, aggregate contributions that may be made
by all contributors to one (or more) education IRAs established
on behalf of any particular beneficiary is limited to $2,000
for each year.
Qualified expenses
The bill expands the definition of qualified education
expenses that may be paid with tax-free distributions from an
education IRA. Specifically, the definition of qualified
education expenses is expanded to include ``qualified
elementary and secondary education expenses,'' meaning (1)
tuition, fees, academic tutoring, special needs services,
books, supplies, and equipment (including computers and related
software and services) incurred in connection with the
enrollment or attendance of the designated beneficiary as an
elementary or secondary student at a public, private, or
religious school providing elementary or secondary education
(kindergarten through grade 12), and (2) room and board,
uniforms, transportation, and supplementary items and services
(including extended-day programs) required or provided by such
a school in connection with such enrollment or attendance of
the designated beneficiary.\4\ ``Qualified elementary and
secondary education expenses'' also includes certain
homeschooling education expenses if the requirements of any
applicable State or local law are met with respect to such
homeschooling.
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\4\ Contributions made to education IRAs prior to the effective
date of the provision (and earnings thereon) may be used for
distributions for qualified elementary and secondary education expenses
made after January 1, 2001. Thus, it is not necessary for trustees of
education IRAs to keep separate accounts with respect to contributions
made prior to the effective date of the provision and earnings thereon.
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Under the bill, the definition of ``qualified higher
education expenses'' is modified to mean: (1) tuition and fees
required for the enrollment or attendance of a designated
beneficiary at an eligible education institution; and (2)
expenses for books, supplies, and equipment incurred in
connection with such enrollment or attendance (but not in
excess of the allowance for books and supplies determined by
the educational institution for purposes of Federal financial
assistance programs).\5\ The bill provides that ``qualified
higher education expenses'' does not include expenses for
education involving sports, games, or hobbies unless this
education is part of the student's degree program or is taken
to acquire or improve job skills of the individual. The bill
does not change the definition of ``qualified higher education
expenses'' with respect to expenses for room and board.
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\5\ ``Qualified higher education expenses'' for purposes of
education IRAs are defined by reference to the definition of such
expenses for purposes of qualified State tuition programs (sec.
530(b)(2)(A)). Because the bill modifies the definition of ``qualified
higher education expenses'' for purposes of qualified State tuition
programs (sec. 529(e)(3)), the definition of ``qualified higher
education expenses'' for education IRAs is also modified.
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Special needs beneficiaries
The bill also provides that, although contributions to an
education IRA generally may not be made after the designated
beneficiary reaches age 18, contributions may continue to be
made to an education IRA in the case of a special needs
beneficiary (as defined by Treasury Department regulations). In
addition, under the bill, in the case of a special needs
beneficiary, a deemed distribution of any balance in an
education IRA does not occur when the beneficiary reaches age
30.
Contributions by persons other than individuals
The bill clarifies that corporations and other entities
(including tax-exempt organizations) are permitted to make
contributions to education IRAs regardless of the income of the
corporation or entity during the year of the contribution.
Contributions permitted until April 15
Under the bill, individual contributors to education IRAs
are 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), generally April 15.\6\ The bill
also provides that the additional 10-percent tax on
distributions not used for qualified higher education expenses
does not apply to the distribution of any contribution to an
education IRA made during the taxable year if such distribution
is made on or before the first day of the sixth month
(generally June 1) of the taxable year following the taxable
year during which the contribution was or was deemed made,
provided the distribution is accompanied by the amount of net
income attributable to the contribution.
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\6\ It is expected that trustees of education IRAs will require
documentation from a contributor (whether an individual, corporation,
or other entity) indicating the taxable year to which the contribution
should be allocated.
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Coordination with HOPE and Lifetime Learning credits
The bill allows a taxpayer to claim a HOPE credit or
Lifetime Learning credit for a taxable year and to exclude from
gross income amounts distributed (both the principal and the
earnings portions) from an education IRA on behalf of the same
student as long as the distribution is not used for the same
educational expenses for which a credit is claimed.
Coordination with qualified tuition programs
The bill repeals the excise tax on contributions made by
any person to an education IRA on behalf of a beneficiary
during any taxable year in which any contributions are made by
anyone to a qualified State tuition program on behalf of the
same beneficiary (sec. 4973(e)(1)(B)).
Change name to ``Education Savings Accounts''
The bill changes the name of education IRAs to ``Education
Savings Accounts.''
Effective Date
The provisions relating to education IRAs are effective
with respect to taxable years beginning after December 31,
2000, except that the provision changing the name of education
IRAs to Education Savings Accounts is effective on the date of
enactment.
B. Allow Tax-Free Distributions From State and Private Education
Programs (Sec. 3 of the Bill and Sec. 529 of the Code)
Present Law
Section 529 provides tax-exempt status to ``qualified State
tuition programs,'' meaning certain programs established and
maintained by a State (or agency or instrumentality thereof)
under which persons may (1) purchase tuition credits or
certificates on behalf of a designated beneficiary that entitle
the beneficiary to a waiver or payment of qualified higher
education expenses of the beneficiary, or (2) make
contributions to an account that is established for the purpose
of meeting qualified higher education expenses of the
designated beneficiary of the account (a ``savings account
plan''). The term ``qualified higher education expenses''
generally has the same meaning as does the term for purposes of
education IRAs (as described above) and, thus, includes
expenses for tuition, fees, books, supplies, and equipment
required for the enrollment or attendance at an eligible
educational institution,\7\ as well as certain room and board
expenses for any period during which the student is at least a
half-time student.
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\7\ ``Eligible educational institutions'' are defined the same for
purposes of education IRAs and qualified State tuition programs.
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No amount is included in the gross income of a contributor
to, or beneficiary of, a qualified State tuition program with
respect to any distribution from, or earnings under, such
program, except that (1) amounts distributed or educational
benefits provided to a beneficiary (e.g., when the beneficiary
attends college) are included in the beneficiary's gross income
(unless excludable under another Code section) to the extent
such amounts or the value of the educational benefits exceed
contributions made on behalf of the beneficiary, and (2)
amounts distributed to a contributor (e.g., when a parent
receives a refund) are included in the contributor's gross
income to the extent such amounts exceed contributions made on
behalf of the beneficiary.\8\
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\8\ Distributions from qualified State tuition programs are treated
as representing a pro-rata share of the principal (i.e., contributions)
and accumulated earnings in the account.
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A qualified State tuition program is required to provide
that purchases or contributions only be made in cash.\9\
Contributors and beneficiaries are not allowed to directly or
indirectly direct the investment of contributions to the
program (or earnings thereon). The program is required to
maintain a separate accounting for each designated beneficiary.
A specified individual must be designated as the beneficiary at
the commencement of participation in a qualified State tuition
program (i.e., when contributions are first made to purchase an
interest in such a program), unless interests in such a program
are purchased by a State or local government or a tax-exempt
charity described in section 501(c)(3) as part of a scholarship
program operated by such government or charity under which
beneficiaries to be named in the future will receive such
interests as scholarships. A transfer of credits (or other
amounts) from one account benefitting one designated
beneficiary to another account benefitting a different
beneficiary is considered a distribution (as is a change in the
designated beneficiary of an interest in a qualified State
tuition program), unless the beneficiaries are members of the
same family. For this purpose, the term ``member of the
family'' means persons described in paragraphs (1) through (8)
of section 152(a)--e.g., sons, daughters, brothers, sisters,
nephews and nieces, certain in-laws--and any spouse of such
persons or of the original beneficiary. Earnings on an account
may be refunded to a contributor or beneficiary, but the State
or instrumentality must impose a more than de minimis monetary
penalty unless the refund is (1) used for qualified higher
education expenses of the beneficiary, (2) made on account of
the death or disability of the beneficiary, or (3) made on
account of a scholarship received by the designated beneficiary
to the extent the amount refunded does not exceed the amount of
the scholarship used for higher education expenses.
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\9\ Sections 529(c)(2), (c)(4), and (c)(5), and section 530(d)(3)
provide special estate and gift tax rules for contributions made to,
and distributions made from, qualified State tuition programs and
education IRAs.
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To the extent that a distribution from a qualified State
tuition program is used to pay for qualified tuition and
related expenses (as defined in sec. 25A(f)(1)), the
distributee (or another taxpayer claiming the distributee as a
dependent) may claim the HOPE credit or Lifetime Learning
credit under section 25A with respect to such tuition and
related expenses (assuming that the other requirements for
claiming the HOPE credit or Lifetime Learning credit are
satisfied and the modified AGI phaseout for those credits does
not apply).
Reasons for Change
The Committee believes that distributions from qualified
tuition programs should not be subject to Federal income tax to
the extent that such distributions are used to pay for
qualifiedhigher education expenses of undergraduate or graduate
students who are attending institutions of higher education or certain
vocational schools. In addition, the Committee believes that the
present-law rules governing qualified tuition programs should be
expanded to permit private educational institutions to maintain certain
prepaid tuition programs.
explanation of provision
Qualified tuition program
The bill expands the definition of ``qualified tuition
program'' to include certain prepaid tuition programs
established and maintained by one or more eligible educational
institutions (which may be private institutions) that satisfy
the requirements under section 529 (other than the present-law
State sponsorship rule). In the case of a qualified tuition
program maintained by one or more private educational
institutions, persons are able to purchase tuition credits or
certificates on behalf of a designated beneficiary (as
described in section 529(b)(1)(A)(i)), but are not able to make
contributions to a savings account plan (described in section
529(b)(1)(A)(ii)).
Exclusion from gross income
Under the bill, distributions from qualified State tuition
programs and from qualified tuition programs established and
maintained by an entity other than a State or agency or
instrumentality thereof are excludable from gross income to the
extent that the distribution is used to pay for qualified
higher education expenses.
Coordination with HOPE and Lifetime Learning credits
The bill allows a taxpayer to claim a HOPE credit or
Lifetime Learning credit for a taxable year and to exclude from
gross income amounts distributed (both the principal and the
earnings portions) from a qualified tuition program on behalf
of the same student as long as the distribution is not used for
the same expenses for which a credit is claimed.
Definition of qualified higher education expenses
Under the bill, the definition of ``qualified higher
education expenses'' is modified to mean: (1) tuition and fees
required for the enrollment or attendance of a designated
beneficiary at an eligible educational institution; and (2)
expenses for books, supplies, and equipment incurred in
connection with such enrollment or attendance (but not in
excess of the allowance for books and supplies determined by
the educational institution for purposes of Federal financial
assistance programs).\10\ The bill provides that ``qualified
higher education expenses'' do not include expenses for
education involving sports, games, or hobbies unless this
education is part of the student's degree program or is taken
to acquire or improve job skills of the individual. The bill
does not change the definition of ``qualified higher education
expenses'' with respect to expenses for room and board.
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\10\ It is intended that, with respect to a distribution made from
a qualified tuition program that does not exceed the allowance for
books and supplies determined for purposes of Federal financial
assistance by the eligible educational institution where the
beneficiary is enrolled, Treasury regulations will provide that
beneficiaries need not substantiate actual purchases of books,
supplies, and equipment.
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Rollovers for benefit of same beneficiary
The bill provides that a transfer of credits (or other
amounts) from one qualified tuition program for the benefit of
a designated beneficiary to another qualified tuition program
for the benefit of the same beneficiary is not considered a
distribution for a maximum of one such transfer in each 1-year
period.
Member of family
The bill provides that, for purposes of tax-free rollovers
and changes of designated beneficiaries, a ``member of the
family'' includes first cousins of such beneficiary.
Short title
The bill provides that the section of the bill relating to
qualified tuition plans may be cited as the ``Collegiate
Learning and Student Savings (CLASS) Act.''
effective date
The provision is generally effective for taxable years
beginning after December 31, 2000. The provision modifying the
definition of qualified higher education expenses is effective
for amounts paid for education furnished after December 31,
2000.
C. Eliminate Tax on Awards under the National Health Service Corps
Scholarship Program, the F. Edward Hebert Armed Forces Health
Professions Scholarship and Financial Assistance Program, the National
Institutes of Health Undergraduate Scholarship Program, and Certain
State-Sponsored Scholarship Programs (Sec. 4 of the Bill and Sec. 117
of the Code)
Present Law
Section 117 excludes from gross income qualified
scholarships received by an individual who is a candidate for a
degree and used for tuition and fees required for the
enrollment or attendance (or for fees, books, supplies, and
equipment required for courses of instruction) at a primary,
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to
scholarship amounts covering regular living expenses, such as
room and board. In addition to the exclusion for qualified
scholarships, section 117 provides an exclusion from gross
income for qualified tuition reductions for certain education
provided to employees (and their spouses and dependents) of
certain educational organizations.
Section 117(c) specifically provides that the exclusion for
qualified scholarships and qualified tuition reductions does
not apply to any amount received by a student that represents
payment for teaching, research, or other services by the
student required as a condition for receiving the scholarship
or tuition reduction.
The National Health Service Corps Scholarship Program (the
``NHSC Scholarship Program'') and the F. Edward Hebert Armed
Forces Health Professions Scholarship and Financial Assistance
Program (the ``Armed Forces Scholarship Program'') provide
education awards to participants on condition that the
participants provide certain services. In the case of the NHSC
Scholarship Program, the recipient of the scholarship is
obligated to provide medical services in a geographic area (or
to an underserved population group or designated facility)
identified by the Public Health Service as having a shortage of
health-care professionals. In the case of the Armed Forces
Scholarship Program, the recipient of the scholarship is
obligated to serve a certain number of years in the military at
an armed forces medical facility. The National Institutes of
Health Undergraduate Scholarship Program (the ``NIH''
Scholarship Program) awards scholarships to students from
disadvantaged backgrounds interested in pursuing a career in
biomedical research. In exchange, the recipients must work for
the National Institutes of Health after graduation. Several
States provide a limited number of scholarships to students in
health professions who are obligated to work in underserved
areas for a period of time after graduation. Because the
recipients of scholarships in these programs are required to
perform services in exchange for the education awards, the
awards used to pay higher education expenses are taxable income
to the recipient.
reasons for change
To improve health care services in underserved areas, the
Committee believes that it is appropriate to provide tax-free
treatment for scholarships received by students under the NHSC
Scholarship Program, Armed Forces Scholarship Program, NIH
Scholarship Program, and State-sponsored programs with similar
objectives.
explanation of provision
The bill provides that amounts received by an individual
under the NHSC Scholarship Program and the Armed Forces
Scholarship Program, the NIH Scholarship Program and any State-
sponsored health scholarship program determined by the
Secretary of the Treasury to have substantially similar
objectives to these programs are eligible for tax-free
treatment as qualified scholarships under section 117, without
regard to any service obligation by the recipient. As with
other qualified scholarships under section 117, the tax-free
treatment does not apply to amounts received for regular living
expenses, including room and board.
Effective Date
The provision is generally effective for amounts received
in taxable years beginning after December 31, 1993. The
provision for education awards received under a State-sponsored
health scholarship program is effective for amounts received in
taxable years beginning after December 31, 1999.
D. Liberalize Tax-Exempt Bond Arbitrage Rebate Exceptions for Public
School Construction Bonds (Secs. 5-6 of the Bill and Sec. 148 of the
Code)
present law
Interest on debt incurred by State or local governments is
excluded from income if the proceeds of the borrowing are used
to carry out governmental functions of those entities or the
debt is repaid with governmental funds (sec. 103). Like other
activities carried out and paid for by State and local
governments, the construction, renovation, and operation of
public schools is an activity eligible for financing with the
proceeds of tax-exempt bonds.
The Federal income tax does not apply to the income of
State and local governments that is derived from the exercise
of an essential governmental function. To prevent these tax-
exempt entities from issuing more tax-exempt bonds than is
necessary for the activity being financed or from issuing such
bonds earlier than necessary, the Code includes arbitrage
restrictions limiting the ability to profit from investment of
tax-exempt bond proceeds. In general, arbitrage profits may be
earned only during specified periods (e.g., defined ``temporary
periods'') before funds are needed for the purpose of the
borrowing or on specified types of investments (e.g.,
``reasonably required reserve or replacement funds''). Subject
to limited exceptions, profits that are earned during these
periods or on such investments must be rebated to the Federal
Government.
Present law includes three exceptions applicable to
education-related bonds. First, issuers of all types of tax-
exempt bonds are not required to rebate arbitrage profits if
all of the proceeds of the bonds are spent for the purpose of
the borrowing within six months after issuance. In the case of
governmental bonds (including bonds to finance public schools),
the six-month expenditure exception is treated as satisfied if
at least 95 percent of the proceeds is spent within six months
and the remaining five percent is spent within 12 months after
the bonds are issued.
Second, in the case of bonds issued to finance certain
construction activities, including school construction and
renovation, the six-month period is extended to 24 months for
construction proceeds. Arbitrage profits earned on construction
proceeds are not required to be rebated if all such proceeds
(other than certain retainage amounts) are spent by the end of
the 24-month period and prescribed intermediate spending
percentages are satisfied.
Third, governmental bonds issued by ``small'' governments
are not subject to the rebate requirement. Small governments
are defined as general purpose governmental units that issue no
more than $5 million of tax-exempt governmental bonds in a
calendar year. The $5 million limit is increased to $10 million
if at least $5 million of the bonds are used to finance
construction of public schools.
reasons for change
The policy underlying the arbitrage rebate exception for
bonds of small governmental units is to reduce complexity for
these entities because they may not have in-house financial
staff to engage in the expenditure and investment tracking
necessary for rebate compliance. The exception further is
justified by the limited potential for arbitrage profits at
small issuance levels and limitation of the provision to
governmental bonds, which typically require voter approval
before issuance. The Committee believes that a limited increase
of $5 million per year for public school construction bonds
will more accurately conform this present-law exception to
current school construction costs.
The Committee is aware that a great need exists for
construction and renovation of public schools if American
educational excellence is to be maintained. The Committee has
determined that a more liberal spend-down exception for public
school construction bonds is appropriate to allow issuers
greater flexibility in the timing of bond issuance for this
limited purpose to meet actual construction needs.
explanation of provision
Increase amount of bonds that may be issued by governments qualifying
for the ``small governmental unit'' arbitrage rebate exception
The additional amount of governmental bonds for public
schools construction that small governmental units may issue
without being subject to the arbitrage rebate requirement is
increased from $5 million to $10 million. Thus, these
governmental units may issue up to $15 million of governmental
bonds in a calendar year, provided that at least $10 million of
the bonds are used to finance construction of public schools.
Liberalize construction bond expenditure rule for governmental bonds
for public schools
The present-law 24-month expenditure exception to the
arbitrage rebate requirement is liberalized for certain public
school bonds. Under the bill, no rebate is required with
respect to earnings on available construction proceeds of
public school bonds if the proceeds are spent within 48 months
after the bonds were issued and the following intermediate
spending levels were satisfied:
12 months--At least 10 percent
24 months--At least 30 percent
36 months--At least 60 percent
48 months--100 percent (less present-law retainage amounts
which must be spent within 60 months of issuance)
effective date
The increase in the small governmental unit arbitrage
rebate exception is effective for obligations issued in
calendar years beginning after December 31, 2000. The
liberalized expenditure exception for public school
construction bonds is effective for obligations issued after
December 31, 2000.
E. Student Loan Interest Deduction (Sec. 7 of the Bill and Sec. 221 of
the Code)
present law
Certain individuals who have paid interest on qualified
education loans may claim an above-the-line deduction for such
interest expenses, subject to a maximum annual deduction limit
(sec. 221). The deduction is allowed only with respect to
interest paid on a qualified education loan during the first 60
months in which interest payments are required. Required
payments of interest generally do not include nonmandatory
payments, such as interest payments made during a period of
loan forbearance. Months during which interest payments are not
required because the qualified education loan is in deferral or
forbearance do not count against the 60-month period. No
deduction is allowed to an individual if that individual is
claimed as a dependent on another taxpayer's return for the
taxable year.
A qualified education loan generally is defined as any
indebtedness incurred solely to pay for certain costs of
attendance (including room and board) of a student (who may be
the taxpayer,taxpayer's spouse, or any dependent of the
taxpayer as of the time the indebtedness was incurred) who is enrolled
in a degree program on at least a half-time basis at (1) an accredited
post-secondary educational institution defined by reference to section
481 of the Higher Education Act of 1965, or (2) an institution
conducting an internship or residency program leading to a degree or
certificate from an institution of higher education, a hospital, or a
health care facility conducting postgraduate training.
The maximum allowable deduction per taxpayer return is
$2,000 in 2000, and $2,500 in 2001 and thereafter.\11\ The
deduction is phased out ratably for individual taxpayers with
modified adjusted gross income (``AGI'') of $40,000-$55,000
($60,000-$75,000 for married couples filing joint returns). The
income ranges will be indexed for inflation after 2002.
---------------------------------------------------------------------------
\11\ The maximum allowable deduction was $1,000 for 1998 and $1,500
for 1999.
---------------------------------------------------------------------------
reasons for change
The Committee believes that the income phaseouts for the
student loan interest deduction are too low and should be
raised. In addition, the Committee is concerned about the
inequity of the marriage penalty resulting from the phase-out
provisions of the student loan interest deduction. The
Committee believes that relief from the marriage penalty is
appropriate.
The Committee understands that many students incur
considerable debt in the course of obtaining undergraduate and
graduate education. The Committee believes that it is
appropriate to expand the deduction for individuals who have
paid interest on qualified education loans by repealing the
limitation that the deduction is allowed only with respect to
interest paid during the first 60 months in which interest
payments are required. In addition, the repeal of the 60-month
limitation lessens complexity and administrative burdens for
taxpayers, lenders, loan servicing agencies, and the Internal
Revenue Service.
explanation of provision
The bill increases the beginning point of the income
phaseout for the student loan interest deduction for individual
taxpayers to $45,000. The bill also increases the beginning
point of the income phaseout for taxpayers filing joint returns
to twice the beginning point of the income phaseouts applicable
to single taxpayers. Thus, the phase-out ranges are $45,000 to
$60,000 for individual taxpayers and $90,000 to $105,000 for
married couples filing joint returns.
The bill also repeals both the limit on the number of
months during which interest paid on a qualified education loan
is deductible and the restriction that nonmandatory payments of
interest are not deductible.
Effective Date
The provisions relating to the income phaseout are
effective for taxable years beginning after December 31, 2000.
The provision repealing the 60-month limit on deductible
student loan interest and the restriction on nonmandatory
payments is effective for interest paid on qualified education
loans after December 31, 2000.
F. Two-Percent Floor Not to Apply to Professional Development Expenses
of Teachers (Sec. 8 of the Bill and Sec. 162 of the Code)
present law
In general, taxpayers are not permitted to deduct education
expenses. However, employees may deduct the cost of certain
work-related education. For costs to be deductible, the
education must either be required by the taxpayer's employer or
by law to retain taxpayer's current job or be necessary to
maintain or improve skills required in the taxpayer's current
job. Expenses incurred for education that is necessary to meet
minimum education requirements of an employee's present trade
or business or that can qualify an employee for a new trade or
business are not deductible.
An employee is allowed to deduct work-related education and
other business expenses only to the extent such expenses
(together with other miscellaneous itemized deductions) exceed
two percent of the taxpayer's adjusted gross income.
reasons for change
The Committee recognizes the importance of teachers
receiving continuing education and remaining up to date. The
Committee believes that the tax law should facilitate such
education of teachers who want to maintain and improve their
academic and professional skills.
explanation of provision
The bill provides that qualified professional development
expenses not in excess of $1,000 incurred by an elementary or
secondary school teacher (including instructors, aides,
counselors and principals) with respect to certain courses of
instruction would not be subject to the two-percent floor on
miscellaneous itemized deductions. Qualified professional
development expenses are expenses for tuition, fees, books,
supplies, equipment, and transportation required for enrollment
or attendance in a qualified course of instruction, provided
that such expenses are otherwise deductible under present law.
A qualified course of instruction means a professional
conference or a course of instruction at an institution of
higher education (as defined in sec. 481 of the Higher
Education Act of 1965), which is part of a program of
professional development that is approved and certified by the
appropriate local educational agency as furthering the
individual's teaching skills.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2000.
G. Extension of Deduction for Computer Donations to Schools (Sec. 9 of
the Bill and Sec. 170(e)(6) of the Code)
Present Law
The maximum charitable contribution deduction that may be
claimed by a corporation for any one taxable year is limited to
10 percent of the corporation's taxable income for that year
(disregarding charitable contributions and with certain other
modifications) (sec. 170(b)(2)). Corporations also are subject
to certain limitations based on the type of property
contributed. In the case of a charitable contribution of short-
term gain property, inventory, or other ordinary income
property, the amount of the deduction generally is limited to
the taxpayer's basis (generally, cost) in the property.
However, special rules in the Code provide an augmented
deduction for certain corporate contributions. Under these
special rules, the amount of the augmented deduction is equal
to the lesser of (1) the basis of the donated property plus
one-half of the amount of ordinary income that would have been
realized if the property had been sold, or (2) twice basis.
Section 170(e)(6) allows corporate taxpayers an augmented
deduction for qualified contributions of computer technology
and equipment (i.e., computer software, computer or peripheral
equipment, and fiber optic cable related to computer use) to be
used within the United States for educational purposes in
grades K-12. Eligible donees are: (1) any educational
organization that normally maintains a regular faculty and
curriculum and has a regularly enrolled body of pupils in
attendance at the place where its educational activities are
regularly carried on; and (2) tax-exempt charitable
organizations that are organized primarily for purposes of
supporting elementary and secondary education. A private
foundation also is an eligible donee, provided that, within 30
days after receipt of the contribution, the private foundation
contributes the property to an eligible donee described above.
Qualified contributions are limited to gifts made no later
than two years after the date the taxpayer acquired or
substantially completed the construction of the donated
property. In addition, the original use of the donated property
must commence with the donor or the donee. Accordingly,
qualified contributions generally are limited to property that
is no more than two years old. Such donated property could be
computer technology or equipment that is inventory or
depreciable trade or business property in the hands of the
donor.
Donee organizations are not permitted to transfer the
donated property for money or services (e.g., a donee
organization cannot sell the computers). However, a donee
organization may transfer the donated property in furtherance
of its exempt purposes and be reimbursed for shipping,
installation, and transfer costs. For example, if a corporation
contributes computers to a charity that subsequently
distributes the computers to several elementary schools in a
given area, the charity could be reimbursed by the elementary
schools for shipping, transfer, and installation costs.
The special treatment applies only to donations made by C
corporations. Thus, S corporations, personal holding companies,
and service organizations are not eligible donors.
The provision is scheduled to expire for contributions made
in taxable years beginning after December 31, 2000.
Reasons for Change
The enhanced deduction for certain donations of computer
equipment was enacted to provide an incentive for businesses to
invest their computer equipment and software for the benefit of
primary and secondary school students, thereby helping to
provide America's schools with the technological resources
necessary to prepare both teachers and students for a
technologically advanced present and future. The Committee
believes that the incentive provided by the enhanced deduction
should be continued.
Explanation of Provision
The bill extends the present-law augmented deduction under
section 170(e)(6) for one year, so that it expires for
contributions made in taxable years beginning after December
31, 2001.
Effective Date
The provision is effective on the date of enactment.
III. VOTES OF THE COMMITTEE
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the following statements are made
concerning the votes of the Committee on Ways and Means in its
consideration of the bill, H.R. 7.
MOTION TO REPORT THE BILL
The bill, H.R. 7, as amended, was ordered favorably
reported by a roll call vote of 21 yeas to 16 nays (with a
quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Archer..................... X ........ ......... Mr. Rangel........ ........ X ........
Mr. Crane...................... ........ ........ ......... Mr. Stark......... ........ X ........
Mr. Thomas..................... X ........ ......... Mr. Matsui........ ........ X ........
Mr. Shaw....................... X ........ ......... Mr. Coyne......... ........ X ........
Mrs. Johnson................... ........ X ......... Mr. Levin......... ........ X ........
Mr. Houghton................... X ........ ......... Mr. Cardin........ ........ X ........
Mr. Herger..................... X ........ ......... Mr. McDermott..... ........ ........ ........
Mr. McCrery.................... X ........ ......... Mr. Kleczka....... ........ X ........
Mr. Camp....................... X ........ ......... Mr. Lewis (GA).... ........ X ........
Mr. Ramstad.................... X ........ ......... Mr. Neal.......... ........ X ........
Mr. Nussle..................... X ........ ......... Mr. McNulty....... ........ X ........
Mr. Johnson.................... X ........ ......... Mr. Jefferson..... ........ X ........
Ms. Dunn....................... X ........ ......... Mr. Tanner........ ........ X ........
Mr. Collins.................... X ........ ......... Mr. Becerra....... ........ X ........
Mr. Portman.................... X ........ ......... Mrs. Thurman...... ........ X ........
Mr. English.................... X ........ ......... Mr. Doggett....... ........ X ........
Mr. Watkins.................... X ........ .........
Mr. Hayworth................... X ........ .........
Mr. Weller..................... X ........ .........
Mr. Hulshof.................... X ........ .........
Mr. McInnis.................... X ........ .........
Mr. Lewis (KY)................. X ........ .........
Mr. Foley...................... X ........ .........
----------------------------------------------------------------------------------------------------------------
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimates
In compliance with clause 3(d)(2) of rule XIII of the Rules
of the House of Representatives, the following statement is
made concerning the estimated budget effects of H.R. 7 as
reported.
The bill, as reported, is estimated to have the following
effect on the budget:
ESTIMATED BUDGET EFFECTS OF H.R. 7, THE ``EDUCATION SAVINGS AND SCHOOL EXCELLENCE ACT OF 2000,'' AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS
[Fiscal years 2000-2010, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2000- 2000-
Provision Effective 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2005 2010
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1. Education savings accounts tyba 12/31/00............ ....... -53 -175 -267 -356 -447 -543 -645 -749 -856 -965 -1,298 -5,057
(formerly ``Education IRSs'')--
increase the annual contribution
limit to $2,000; expand the
definition of qualified education
expenses to include elementary and
secondary education expenses (and
after-school programs); allow ESAs to
be used for special needs
beneficiaries; allow corporations and
other entities to contribute to ESAs;
allow contributions until April 15 of
following year; and allow taxpayer to
exclude ESA distribution from gross
income and claim HOPE or Lifetime
Learning credit as long as they are
not used for same expenses.
2. Prepaid Savings Plans--State- tyba 12/31/00............ ....... -11 -35 -53 -75 -100 -129 -158 -185 -213 -236 -275 -1,196
sponsored plans: exclusions for
distributions for education expenses;
private plans: tax deferral on income
and exclusion for distributions for
education expenses; allow tax-free
education withdrawals from prepaid
savings plans as long as they are not
used for the same expenses for which
HOPE or Lifetime Learning credits are
claimed; miscellaneous other changes
(clarify definition; one rollover per
year).
3. Exclude from tax awards under the -tyba 12/31/93 & tyba 12/ -1 -5 -3 -3 -3 -3 -4 -4 -4 -5 -5 -20 -41
following programs: National Health 31/99.
Corps Scholarship program, beginning
in 1994; F. Edward Hebert Armed
Forces Health Professions Scholarship
program, beginning in 1994; National
Institutes of Health Undergraduate
Scholarship Program, beginning in
1994; and similar State-sponsored
scholarship programs, beginning in
2000.
4. Increase the school construction oii cyba 2000............ ....... (\1\) -3 -5 -6 -11 -14 -15 -16 -17 -18 -24 -104
small issuer arbitrage rebate
exception from $10 million to $15
million.
5. Provide new 4-year expenditure bia 12/31/00............. ....... -16 -139 -262 -296 -312 -328 -331 -326 -320 -312 -1,027 -2,644
schedule for bonds for public school
construction under the arbitrage
rebate rules.
6. Increase student loan deduction tyba 12/31/00............ ....... -52 -211 -226 -240 -253 -262 -272 -282 -291 -301 -981 -2,389
income limits for single taxpayers by
$5,000 and adjust the income limits
for married couples filing joint
returns to twice that of a single
taxpayer, phase-out range of $15,000
for both; repeal 60-month rule.
7. 2% floor on miscellaneous itemized tyba 12/31/00............ ....... -5 -10 -10 -11 -11 -11 -12 -12 -12 -12 -47 -106
deductions not to apply to qualified
professional development expenses;
with $1,000 cap.
8. Corporate contributions of computer 1/1/01................... ....... -43 -37 -2 ....... ........ ........ ........ ........ ........ ........ -82 -82
equipment to primary and secondary
schools (one-year extension through
12/31/01.
---------------------------------------------------------------------------------------------------------------------------------------------------------
Net total....................... ......................... -1 -185 -613 -828 -987 -1,137 -1,291 -1,437 -1,574 -1,714 -1,849 -3,754 -11,619
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Loss of less than $500,000.
Legend for ``Effective'' column: bia=bonds issued after; cyba=calendar years beginning after; oil=obligations issued in; tyba=taxable years beginning after.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
B. Statement Regarding New Budget Authority and Tax Expenditures
Budget authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority.
Tax expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
revenue-reducing income tax provisions involve increased tax
expenditures. (See amounts in table in Part IV.A., above.)
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring cost estimate
prepared by the Congressional Budget Office, the Committee
advises that the Congressional Budget Office has submitted the
following statement on this bill.
U.S. Congress,
Congressional Budget Office,
Washington, DC, March 23, 2000.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 7, the Education
Savings and Schools Excellence Act of 1999.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Hester
Grippando.
Sincerely, Barry B. Anderson
(For Dan L. Crippen, Director).
Enclosure.
H.R. 7--Education Savings and School Excellence Act of 1999
Summary: H.R. 7 would expand the definition of a qualified
education expense under an Education Savings Account (formally
known as an education IRA) and increases its annual
contribution limit. The bill would also liberalize the
exemptions from the rules for arbitrage rebates from certain
tax-exempt bonds; increase the income limits and repeal the 60-
month limit for deductibility of student loan interest; allow
tax-free distributions from state and private education
programs; amend the two-percent floor rule on miscellaneous
deductions as it applies to qualified professional development
expenses; extend for one year enhanced deductions for corporate
contributions of computer equipment to schools; and eliminate
the tax on certain scholarship awards. The Joint Committee on
Taxation (JCT) estimates that H.R. 7 would reduce governmental
receipts by about $4 billion over the 2000-2005 period and by
about $12 billion over the 2000-2010 period. Because the bill
would affect receipts, pay-as-you-go procedures would apply.
H.R. 7 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA)
and would impose no costs on state, local, or tribal
governments.
Estimated cost to the Federal Government: The estimated
budgetary impact of H.R. 7 is shown in the following table.
----------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-----------------------------------------------------------------
2000 2001 2002 2003 2004 2005
----------------------------------------------------------------------------------------------------------------
CHANGES IN REVENUES
Estimated Revenues:
On-Budget................................. -1 -182 -612 -826 -985 -1,135
Off-Budget................................ (\1\) -3 -1 -2 -2 -2
-----------------------------------------------------------------
Total Change in Revenues................ -1 -185 -613 -828 -987 -1,137
----------------------------------------------------------------------------------------------------------------
\1\ Less than $500,000.
Source: Joint Committee on Taxation.
Basis of estimate: Estimates of H.R. 7 are provided by JCT.
Pay-as-you-go considerations: The Balanced Budget and
Emergency Deficit Control Act sets up pay-as-you-go procedures
for legislation affecting direct spending or receipts. The net
changes in outlays and governmental receipts that are subject
to pay-as-you-go procedures are shown in the following table.
For the purposes of enforcing pay-as-you-go procedures, only
the effects in the current year, the budget year, and the
succeeding four years are counted.
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in receipts........................ -1 -182 -612 -826 -985 -1,135 -1,289 -1,435 -1,572 -1,712 -1,847
Changes in outlays......................... not applicable
--------------------------------------------------------------------------------------------------------------------------------------------------------
Intergovernmental and private-sector impact: H.R. 7
contains no intergovernmental or private-sector mandates as
defined in the Unfunded Mandates Reform Act (UMRA) and would
impose no costs on state, local, or tribal governments.
Estimate prepared by: Federal Costs: Hester Grippando.
Estimate approved by: G. Thomas Woodward, Assistant
Director for Tax Analysis.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to clause 3(c)(c)(1) of rule XIII of the Rules
of the House of Representatives (relating to oversight
findings), the Committee advises that it was the result of the
Committee's oversight activities concerning the expansion of
the education savings provisions to elementary and secondary
education expenses that the Committee concluded that it is
appropriate to enact the provisions contained in the bill as
reported.
B. Summary of Findings and Recommendations of the Committee on
Government Reform and Oversight
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that no
oversight findings or recommendations have been submitted to
this Committee by the Committee on Government Reform and
Oversight with respect to the provisions contained in the bill.
C. Constitutional Authority Statement
With respect to clause 3(d)(1) of rule XIII of the Rules of
the House of Representatives (relating to Constitutional
Authority), the Committee states that the Committee's action in
reporting this bill is derived from Article I of the
Constitution, Section 7 (``All bills for raising revenue shall
originate in the House of Representatives'') and Section 8
(``The Congress shall have power to lay and collect taxes,
duties, imposts and excises, to pay the debts . . . of the
United States''), and from the 16th Amendment to the
Constitution.
D. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, and tribal
governments.
E. Applicability of House Rule XXI5(b)
Rule XXI5(b) of the Rules of the House of Representatives
provides, in part, that ``No bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase shall be considered as passed or agreed to unless
so determined by a vote of not less than three-fifths of the
Members.'' The Committee has carefully reviewed the provisions
of the bill, and states that the provisions of the bill do not
involve any Federal income tax rate increase within the meaning
of the rule.
F. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the
Joint Committee on Taxation (in consultation with the Internal
Revenue Service and the Department of the Treasury) to provide
a tax complexity analysis. The complexity analysis is required
for all legislation reported by the House Committee on Ways and
Means, the Senate Committee on Finance, or any committee of
conference if the legislation includes a provision that
directly or indirectly amends the Internal Revenue Code and has
widespread applicability to individuals or small businesses.
The staff of the Joint Committee on Taxation has determined
that a complexity analysis is not required under section
4022(b) of the IRS Reform Act because the bill contains no
provisions that amend the Internal Revenue Code and that have
``widespread applicability'' to individuals or small
businesses.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In compliance with clause 3(e) of rule XIII of the Rules
of the House of Representatives, changes in existing law made
by the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
INTERNAL REVENUE CODE
* * * * * * *
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter A--Determination of Tax Liability
* * * * * * *
PART I--TAX ON INDIVIDUALS
* * * * * * *
SEC. 25A. HOPE AND LIFETIME LEARNING CREDITS.
(a) Allowance of Credit.--
* * * * * * *
(e) Election To Have Section Apply.--
(1) In general.--No credit shall be allowed under
subsection (a) for a taxable year with respect to the
qualified tuition and related expenses of an individual
unless the taxpayer elects to have this section apply
with respect to such individual for such year.
(2) Coordination With Exclusions.--An election under
this subsection shall not take effect with respect to
an individual for any taxable year if any portion of
any distribution during such taxable year from an
[education individual retirement] education savings
account is excluded from gross income under section
530(d)(2).
* * * * * * *
SEC. 26. LIMITATION BASED ON TAX LIABILITY; DEFINITION OF TAX
LIABILITY.
(a) * * *
(b) Regular Tax Liability.--For purposes of this part--
(1) * * *
(2) Exception for certain taxes.--For purposes of
paragraph (1), any tax imposed by any of the following
provisions shall not be treated as tax imposed by this
chapter:
(A) * * *
* * * * * * *
(E) section 530(d)(3) (relating to additional
tax on certain distributions from [education
individual retirement] education savings
accounts),
* * * * * * *
Subchapter B--Computation of Taxable Income
* * * * * * *
PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE
INCOME, ETC.
* * * * * * *
SEC. 67. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS.
(a) * * *
* * * * * * *
(b) Miscellaneous Itemized Deductions.--For purposes of this
section, the term ``miscellaneous itemized deductions'' means
the itemized deductions other than--
(1) * * *
* * * * * * *
(11) the deduction under section 171 (relating to
deduction for amortizable bond premium), [and]
(12) the deduction under section 216 (relating to
deductions in connection with cooperative housing
corporations)[.], and
(13) any deduction allowable for the qualified
professional development expenses of an eligible
teacher.
* * * * * * *
(g) Qualified Professional Development Expenses of Eligible
Teachers.--For purposes of subsection (b)(13)--
(1) Qualified professional development expenses.--
(A) In general.--The term ``qualified
professional development expenses'' means
expenses in an amount not to exceed $1,000 for
any taxable year--
(i) for tuition, fees, books,
supplies, equipment, and transportation
required for the enrollment or
attendance of an individual in a
qualified course of instruction, and
(ii) with respect to which a
deduction is allowable under section
162 (determined without regard to this
section).
(B) Qualified course of instruction.--The
term ``qualified course of instruction'' means
a course of instruction which--
(i) is--
(I) at an institution of
higher education (as defined 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 subsection), or
(II) a professional
conference, and
(ii) is part of a program of
professional development which is
approved and certified by the
appropriate local educational agency as
furthering the individual's teaching
skills.
(C) Local educational agency.--The term ``local
educational agency'' has the meaning given such term by
section 14101 of the Elementary and Secondary Education
Act of 1965, as so in effect.
(2) Eligible teacher.--
(A) In general.--The term ``eligible
teacher'' means an individual who is a
kindergarten through grade 12 classroom
teacher, instructor, counselor, aide, or
principal in an elementary or secondary school.
(B) Elementary or secondary school.--The
terms ``elementary school'' and ``secondary
school'' have the meanings given such terms by
section 14101 of the Elementary and Secondary
Education Act of 1965 (20 U.S.C. 8801), as so
in effect.
* * * * * * *
SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE
CONTRACTS.
(a) * * *
* * * * * * *
(e) Amounts Not Received As Annuities.--
(1) * * *
* * * * * * *
(9) Extension of paragraph (2)(b) to qualified
[state] tuition programs and [educational individual
retirement accounts] education savings accounts.--
Notwithstanding any other provision of this subsection,
paragraph (2)(B) shall apply to amounts received under
a qualified [State] tuition program (as defined in
section 529(b)) or under an [education individual
retirement] education savings account (as defined in
section 530(b)). The rule of paragraph (8)(B) shall
apply for purposes of this paragraph.
* * * * * * *
PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME
* * * * * * *
SEC. 117. QUALIFIED SCHOLARSHIPS.
(a) * * *
* * * * * * *
(c) Limitation.--[Subsections (a)]
(1) In general.--Except as provided in paragraph (2),
subsections (a) and (d) shall not apply to that portion
of any amount received which represents payment for
teaching, research, or other services by the student
required as a condition for receiving the qualified
scholarship or qualified tuition reduction.
(2) Exceptions.--Paragraph (1) shall not apply to any
amount received by an individual under--
(A) the National Health Service Corps
Scholarship program under section 338A(g)(1)(A)
of the Public Health Service Act,
(B) the Armed Forces Health Professions
Scholarship and Financial Assistance program
under subchapter I of chapter 105 of title 10,
United States Code,
(C) the National Institutes of Health
Undergraduate Scholarship program under section
487D of the Public Health Service Act, or
(D) any State program determined by the
Secretary to have substantially similar
objectives as such programs.
* * * * * * *
SEC. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO PAY HIGHER
EDUCATION TUITION AND FEES.
(a) * * *
* * * * * * *
(c) Definitions.--For purposes of this section--
(1) * * *
* * * * * * *
(2) Qualified higher education expenses.--
(A) * * *
* * * * * * *
(C) Contributions to qualified [state]
tuition program and [education individual
retirement accounts] education savings
accounts.--Such term shall include any
contribution to a qualified [State] tuition
program (as defined in section 529 on behalf of
a designated beneficiary (as defined in such
section), or to an [education individual
retirement] education savings account (as
defined in section 530 on behalf of an account
beneficiary, who is an individual described in
subparagraph (A); but there shall be no
increase in the investment in the contract for
purposes of applying section 72 by reason of
any portion of such contribution which is not
includible in gross income by reason of this
subparagraph.
* * * * * * *
(d) Special Rules.--
(1) 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) * * *
* * * * * * *
(D) a payment, waiver, or reimbursement of
qualified higher education expenses under a
qualified [State] tuition program (within the
meaning of section 529(b).
(2) Coordination with other higher education
benefits.--The amount of the 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--
(A) the amount of such expenses which are
taken into account in determining the credit
[allowable] allowed to the taxpayer or any
other person under section 25A with respect to
such expenses; and
(B) the amount of such expenses which are
taken into account in determining [the
exclusion under section 530(d)(2)] the
exclusions under sections 529(c)(3)(B)(i) and
530(d)(2).
* * * * * * *
PART IV--TAX EXEMPTION REQUIREMENTS FOR STATE AND LOCAL BONDS
* * * * * * *
Subpart B--Private Activity Bonds
* * * * * * *
SEC. 148. ARBITRAGE.
(a) * * *
* * * * * * *
(f) Required Rebate to the United States.--
(1) * * *
* * * * * * *
(4) Special rules for applying paragraph (2).--
(A) * * *
* * * * * * *
(C) Exception from rebate for certain
proceeds to be used to finance construction
expenditures.--
(i) * * *
* * * * * * *
(xviii) 4-year spending requirement
for public school construction issue.--
(I) In general.--In the case
of a public school construction
issue, the spending
requirements of clause (ii)
shall be treated as met if at
least 10 percent of the
available construction proceeds
of the construction issue are
spent for the governmental
purposes of the issue within
the 1-year period beginning on
the date the bonds are issued,
30 percent of such proceeds are
spent for such purposes within
the 2-year period beginning on
such date, 60 percent of such
proceeds are spent for such
purposes within the 3-year
period beginning on such date,
and 100 percent of such proceeds are spent for such purposes within the
4-year period beginning on such date.
(II) Public school
construction issue.--For
purposes of this clause, the
term ``public school
construction issue'' means any
construction issue if no bond
which is part of such issue is
a private activity bond and all
of the available construction
proceeds of such issue are to
be used for the construction
(as defined in clause (iv)) of
public school facilities to
provide education or training
below the postsecondary level
or for the acquisition of land
that is functionally related
and subordinate to such
facilities.
(III) Other rules to apply.--
Rules similar to the rules of
the preceding provisions of
this subparagraph which apply
to clause (ii) also apply to
this clause.
(D) Exception for governmental units issuing
$5,000,000 or less of bonds.--
(i) * * *
* * * * * * *
(vii) Increase in exception for bonds
financing public school capital
expenditures.--Each of the $5,000,000
amounts in the preceding provisions of
this subparagraph shall be increased by
the lesser of [$5,000,000] $10,000,000
or so much of the aggregate face amount
of the bonds as are attributable to
financing the construction (within the
meaning of subparagraph (C)(iv)) of
public school facilities.
* * * * * * *
PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
* * * * * * *
SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.
(a) * * *
* * * * * * *
(e) Certain Contributions of Ordinary Income and Capital Gain
Property.--
(1) * * *
* * * * * * *
(6) Special rule for contributions of computer
technology and equipment for elementary or secondary
school purposes.--
(A) * * *
* * * * * * *
(F) Termination.--This paragraph shall not
apply to any contribution made during any
taxable year beginning after December 31,
[2000] 2001.
* * * * * * *
PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS
* * * * * * *
SEC. 221. INTEREST ON EDUCATION LOANS.
(a) * * *
* * * * * * *
(b) Maximum Deduction.--
(1) * * *
* * * * * * *
(2) Limitation based on modified adjusted gross
income.--
(A) * * *
(B) Amount of reduction.--The amount
determined under this subparagraph is 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) $40,000 ($60,000 in the
case of a joint return), bears
to
[(ii) $15,000.]
(i) the excess of--
(I) the taxpayer's modified
adjusted gross income for such
taxable year, over
(II) $45,000 ($90,000 in the
case of a joint return), bears
to
(ii) $15,000.
* * * * * * *
[(d) Limit on Period Deduction Allowed.--A deduction shall be
allowed under this section only with respect to interest paid
on any qulified 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. Such 60
months shall be determined in the manner prescribed by the
Secretary in the case of multiple loans which are refinanced
by, or serviced as, a single loan and in the case of loans
incurred before the date of the enactment of this section.]
[(e)] (d) Definitions.--For purposes of this section--
(1) * * *
(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 dateof the enactment of this Act)
at an eligible educational institution, reduced by the sum of--
(A) the amount excluded from gross income
under section 127, 135, 529, or 530 by reason
of such expenses, and
* * * * * * *
[(f)] (e) 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) Married couples must file joint return.--If the
taxpayer is married at the close of the taxable year,
the deduction shall be allowed under subsection (a)
only if the taxpayer and the taxpayer's spouse file a
joint return for the taxable year.
(3) Marital status.--Marital status shall be
determined in accordance with section 7703.
[(g)] (f) Inflation Adjustments.--
(1) In general.--In the case of a taxable year
beginning after 2002, the [$40,000 and $60,000 amounts]
$45,000 and $90,000 amounts in subsection (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 2001'' for
``calendar year 1992'' in subparagraph (B)
thereof.
* * * * * * *
Subchapter F--Exempt Organizations
* * * * * * *
PART VIII--HIGHER EDUCATION SAVINGS ENTITIES
Sec. 529. Qualified [state] tuition programs.
[Sec. 530. Education individual retirement accounts.]
Sec. 530. Education savings accounts.
* * * * * * *
SEC. 529. QUALIFIED [STATE] TUITION PROGRAMS.
(a) General Rule.--A qualified [State] tuition program shall
be exempt from taxation under this subtitle. Notwithstanding
the preceding sentence, such program shall be subject to the
taxes imposed by section 511 (relating to imposition of tax on
unrelated business income of charitable organizations).
(b) Qualified [State] Tuition Program.--For purposes of this
section--
(1) In general.--The term ``qualified [State] tuition
program'' means a program established and maintained by
a State or agency or instrumentality thereof or by one
or more eligible educational institutions--
(A) under which a person--
(i) * * *
(ii) in the case of a program
established and maintained by a State
or agency or instrumentality thereof,
may make contributions to an account
which is established for the purpose of
meeting the qualified higher education
expenses of the designated beneficiary
of the account, and
(B) which meets the other requirements of
this subsection.
(2) Cash contributions.--A program shall not be
treated as a qualified [State] tuition program unless
it provides that purchases or contributions may only be
made in cash.
(3) Refunds.--A program shall not be treated as a
qualified [State] tuition program unless it imposes a
more than de minimis penalty on any refund of earnings
from the account which are not--
* * * * * * *
(4) Separate accounting.--A program shall not be
treated as a qualified [State] tuition program unless
it provides separate accounting for each designated
beneficiary.
(5) No investment direction.--A program shall not be
treated as a qualified [State] tuition program unless
it provides that any contributor to, or designated
beneficiary under, such program may not directly or
indirectly direct the investment of any contributions
to the program (or any earnings thereon).
(6) No pledging of interest as security.--A program
shall not be treated as a qualified [State] tuition
program if it allows any interest in the program or any
portion thereof to be used as security for a loan.
(7) Prohibition on excess contributions.--A program
shall not be treated as a qualified [State] tuition
program unless it provides adequate safeguards to
prevent contributions on behalf of a designated
beneficiary in excess of those necessary to provide for
the qualified higher education expenses of the
beneficiary.
(c) Tax Treatment of Designated Beneficiaries and
Contributors.--
(1) In general.--Except as otherwise provided in this
subsection, no amount shall be includible in gross
income of--
(A) a designated beneficiary under a
qualified [State] tuition program, or
(B) a contributor to such program on behalf
of a designated beneficiary,
* * * * * * *
(3) Distributions.--
(A) In general.--Any distribution under a
qualified [State] tuition program shall be
includible in the gross income of the
distributee in the manner as provided under
section 72 to the extent not excluded from
gross income under any other provision of this
chapter.
[(B) In-kind distributions.--Any benefit
furnished to a designated beneficiary under a
qualified State tuitionprogram shall be treated
as a distribution to the beneficiary.]
(B) Distributions for qualified higher
education expenses.--For purposes of this
paragraph--
(i) In-kind distributions.--No amount
shall be includible in gross income
under subparagraph (A) by reason of a
distribution which consists of
providing a benefit to the distributee
which, if paid for by the distributee,
would constitute payment of a qualified
higher education expense.
(ii) Cash distributions.--In the case
of distributions not described in
clause (i), if--
(I) such distributions do not
exceed the qualified higher
education expenses (reduced by
expenses described in clause
(i)), no amount shall be
includible in gross income, and
(II) in any other case, the
amount otherwise includible in
gross income shall be reduced
by an amount which bears the
same ratio to such amount as
such expenses bear to such
distributions.
(iii) Treatment as distributions.--
Any benefit furnished to a designated
beneficiary under a qualified tuition
program shall be treated as a
distribution to the beneficiary for
purposes of this paragraph.
(iv) Coordination with hope and
lifetime learning credits.--The total
amount of qualified higher education
expenses with respect to an individual
for the taxable year shall be reduced--
(I) as provided in section
25A(g)(2), and
(II) by the amount of such
expenses which were taken into
account in determining the
credit allowed to the taxpayer
or any other person under
section 25A.
(v) Coordination with education
individual retirement accounts.--If,
with respect to an individual for any
taxable year--
(I) the aggregate
distributions to which clauses
(i) and (ii) and section
530(d)(2)(A) apply, exceed
(II) the total amount of
qualified higher education
expenses otherwise taken into
account under clauses (i) and
(ii) (after the application of
clause (iv)) for such year,
the taxpayer shall allocate such
expenses among such distributions for
purposes of determining the amount of
the exclusion under clauses (i) and
(ii) and section 530(d)(2)(A).
(C) Change in beneficiaries or programs.--
(i) Rollovers.--Subparagraph (A)
shall not apply to that portion of any
distribution which, within 60 days of
such distribution, is [transferred to
the credit] transferred--
(I) to another qualified
tuition program for the benefit
of the designated beneficiary,
or
(II) to the credit of another
designated beneficiary under a
qualified [State] tuition
program who is a member of the
family of the designated
beneficiary with respect to
which the distribution was
made.
(ii) Change in designated
beneficiaries.--Any change in the
designated beneficiary of an interest
in a qualified [State] tuition program
shall not be treated as a distribution
for purposes of subparagraph (A) if the
new beneficiary is a member of the
family of the old beneficiary.
(iii) Limitation on certain
rollovers.--Clause (i)(I) shall not
apply to any amount transferred with
respect to a designated beneficiary if,
at any time during the 1-year period
ending on the day of such transfer, any
other amount was transferred with
respect to such beneficiary which was
not includible in gross income by
reason of clause (i)(I).
(D) Operating rules.--For purposes of
applying section 72--
(i) to the extent provided by the
Secretary, all qualified [State]
tuition programs of which an individual
is a designated beneficiary shall be
treated as one program,
* * * * * * *
(d) Reports.--Each officer or employee having control of the
qualified [State] tuition program or their designee shall make
such reports regarding such program to the Secretary and to
designated beneficiaries with respect to contributions,
distributions, and such other matters as the Secretary may
require. 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 the Secretary.
(e) Other definitions and special rules.--For purposes of
this section--
(1) Designated beneficiary.--The term ``designated
beneficiary'' means--
(A) the individual designated at the
commencement of participation in the qualified
[State] tuition program as the beneficiary of
amounts paid (or to be paid) to the program,
(B) in the case of a change in beneficiaries
described in subsection (c)(3)(C), the
individual who is the new beneficiary, and
(C) in the case of an interest in a qualified
[State] tuition program purchased by a State or
local government (or agency or instrumentality
thereof) or an organization described in
section 501(c)(3) and exempt from taxation
under section 501(a) as part of a scholarship
program operated by such government or
organization, the individual receiving such
interest as a scholarship.
(2) Member of family.--The term ``member of the
family'' means, with respect to any designated
beneficiary--
(A) * * *
(B) an individual who bears a relationship to
such beneficiary which is described in
paragraphs (1) through (8) of section 152(a);
[and]
(C) the spouse of any individual described in
subparagraph (B)[.]; and
(D) any first cousin of such beneficiary.
(3) Qualified higher education expenses.--
[(A) In general.--The term ``qualified higher
education expenses'' means tuition, fees,
books, supplies, and equipment required for the
enrollment or attendance of a designated
beneficiary at an eligible educational
institution.]
(A) In general.--The term ``qualified higher
education expenses'' means--
(i) tuition and fees required for the
enrollment or attendance of a
designated beneficiary at an eligible
educational institution for courses of
instruction of such beneficiary at such
institution, and
(ii) expenses for books, supplies,
and equipment which are incurred in
connection with such enrollment or
attendance, but not to exceed the
allowance for books and supplies
included in 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 date of
the enactment of the Education Savings
and School Excellence Act of 2000 as
determined by the eligible educational
institution.
(B) Room and board included for students
under guaranteed plans who are at least half-
time.--
(i) In general.--In the case of an
individual who is an eligible student
(as defined in section 25A(b)(3)) for
any academic period, such term shall
also include reasonable costs for such
period (as determined under the
qualified [State] tuition program)
incurred by the designated beneficiary
for room and board while attending such
institution. For purposes of subsection
(b)(7), a designated beneficiary shall
be treated as meeting the requirements
of this clause.
(ii) Limitation.--The amount treated
as qualified higher education expenses
by reason of the preceding sentence
shall not exceed the minimum amount
(applicable to the student) included
for room and board for such period in
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 date of the enactment of this
paragraph) for the eligible educational
institution for such period.
(C) Exception for education involving sports,
etc.--The term ``qualified higher education
expenses'' shall not include expenses with
respect to any course or other education
involving sports, games, or hobbies unless such
course or other education is part of the
beneficiary's degree program or is taken to
acquire or improve job skills of the
beneficiary.
(4) Application of section 514.--An interest in a
qualified [State] tuition program shall not be treated
as debt for purposes of section 514.
* * * * * * *
[SEC. 530. EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.]
SEC. 530. EDUCATION SAVINGS ACCOUNTS.
(a) General Rule.--An [education individual retirement
account] education savings account shall be exempt from
taxation under this subtitle. Notwithstanding the preceding
sentence, the [education individual retirement account]
education savings account shall be subject to the taxes imposed
by section 511 (relating to imposition of tax on unrelated
business income of charitable organizations).
(b) Definitions and Special Rules.--For purposes of this
section--
(1) [Education individual retirement account]
Education savings account.--The term ``[education
individual retirement account] education savings
account'' means a trust created or organized in the
United States exclusively for the purpose of paying the
qualified [higher] education expenses of an individual
who is the designated beneficiary of the trust (and
designated as an [education individual retirement
account] education savings account at the time created
or organized), but only if the written governing
instrument creating the trust meets the following
requirements:
(A) No contribution will be accepted--
(i) unless it is in cash,
(ii) after the date on which such
beneficiary attains age 18, or
(iii) except in the case of rollover
contributions, if such contribution
would result in aggregate contributions
for the taxable year exceeding [$500]
$2,000.
* * * * * * *
The age limitations in subparagraphs (A)(ii) and (E)
and paragraphs (5) and (6) of subsection (d) shall not
apply to any designated beneficiary with special needs
(as determined under regulations prescribed by the
Secretary).
[(2) Qualified higher education expenses.--
[(A) In general.--The term ``qualified higher
education expenses'' has the meaning given such
term by section 529(e)(3), reduced as provided
in section 25A(g)(2).
[(B) Qualified state tuition programs.--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) for the benefit of the
beneficiary of the account.]
(2) Qualified education expenses.--
(A) In general.--The term ``qualified
education expenses'' means--
(i) qualified higher education
expenses (as defined in section
529(e)(3)), and
(ii) qualified elementary and
secondary education expenses (as
defined in paragraph (4)).
(B) Qualified state tuition programs.--Such
term shall include any contribution to a
qualified State tuition program (as defined in
section 529(b)) on behalf of the designated
beneficiary (as defined in section 529(e)(1));
but there shall be no increase in the
investment in the contract for purposes of
applying section 72 by reason of any portion of
such contribution which is not includible in
gross income by reason of subsection (d)(2).
(3) Eligible educational institution.--The term
``eligible educational institution'' has the meaning
given such term by section 529(e)(5).
(4) Qualified elementary and secondary education
expenses.--
(A) In general.--The term ``qualified
elementary and secondary education expenses''
means--
(i) expenses for tuition, fees,
academic tutoring, special needs
services, books, supplies, computer
equipment (including related software
and services), and other equipment
which are incurred in connection with
the enrollment or attendance of the
designated beneficiary of the trust as
an elementary or secondary school
student at a public, private, or
religious school, and
(ii) expenses for room and board,
uniforms, transportation, and
supplementary items and services
(including extended day programs) which
are required or provided by a public,
private, or religious school in
connection with such enrollment or
attendance.
(B) Special rule for homeschooling.--Such
term shall include expenses described in
subparagraph (A)(i) in connection with
education provided by homeschooling if the
requirements of any applicable State or local
law are met with respect to such education.
(C) School.--The term ``school'' means any
school which provides elementary education or
secondary education (kindergarten through grade
12), as determined under State law.
(5) Time when contributions deemed made.--An
individual shall be deemed to have made a contribution
to an education savings account 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).
(c) Reduction in Permitted Contributions Based on Adjusted
Gross Income.--
(1) In general.--[The maximum amount which a
contributor] In the case of a contributor who is an
individual, the maximum amount the contributor could
otherwise make to an account under this section shall
be reduced by an amount which bears the same ratio to
such maximum amount as--
(A) * * *
* * * * * * *
(d) Tax Treatment of Distributions.--
(1) In general.--Any distribution shall be includible
in the gross income of the distributee in the manner as
provided in section 72.
(2) Distributions for qualified [higher] education
expenses.--
(A) In general.--No amount shall be
includible in gross income under paragraph (1)
if the qualified [higher] education expenses of
the designated beneficiary during the taxable
year are not less than the aggregate
distributions during the taxable year.
(B) Distributions in excess of expenses.--If
such aggregate distributions exceed such
expenses during the taxable year, the amount
otherwise includible in gross income under
paragraph (1) shall be reduced by the amount
which bears the same ratio to the amount which
would be includible in gross income under
paragraph (1) (without regard to this
subparagraph) as the qualified [higher]
education expenses bear to such aggregate
distributions.
[(C) Election to waive exclusion.--A taxpayer
may elect to waive the application of this
paragraph for any taxable year.]
(C) Coordination with hope and lifetime
learning credits and qualified tuition
programs.--For purposes of subparagraph (A)--
(i) Credit coordination.--The total
amount of qualified higher education
expenses with respect to an individual
for the taxable year shall be reduced--
(I) as provided in section
25A(g)(2), and
(II) by the amount of such
expenses which were taken into
account in determining the
credit allowed to the taxpayer
or any other person under
section 25A.
(ii) Coordination with qualified
tuition programs.--If, with respect to
an individual for any taxable year--
(I) the aggregate
distributions during such year
to which subparagraph (A) and
section 529(c)(3)(B) apply,
exceed
(II) the total amount of
qualified education expenses
(after the application of
clause (i)) for such year,
the taxpayer shall allocate such
expenses among such distributions for
purposes of determining the amount of
the exclusion under subparagraph (A)
and section 529(c)(3)(B).
(D) Disallowance of excluded amounts as
[credit or] deduction.--No deduction [or
credit] shall be allowed to the taxpayer under
any other section of this chapter for any
qualified education expenses to the extent
taken into account in determining the amount of
the exclusion under this paragraph.
(3) Special rules for applying estate and gift taxes
with respect to account.--Rules similar to the rules of
paragraphs (2), (4), and (5) of section 529(c) shall
apply for purposes of this section.
(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 individual retirement account]
education savings account which is includible
in gross income shall be increased by 10
percent of the amount which is so includible.
(B) Exceptions.--Subparagraph (A) shall not
apply if the payment or distribution is--
(i) made to a beneficiary (or to the
estate of the designated beneficiary)
on or after the death of the designated
beneficiary,
(ii) attributable to the designated
beneficiary's being disabled (within
the meaning of section 72(m)(7)),
(iii) made on account of a
scholarship, allowance, or payment
described in section 25A(g)(2) received
by the account holder to the extent the
amount of the payment or distribution
does not exceed the amount of the
scholarship, allowance, or payment; or
(iv) an amount which is includible in
gross income solely because the
taxpayer elected under paragraph (2)(C)
to waive the application of paragraph
(2) for the taxable year.
(C) Contributions returned before [due date
of return] certain date.--Subparagraph (A)
shall not apply to the distribution of any
contribution made during a taxable year on
behalf of the designated beneficiary if--
[(i) such distribution is made on or
before the day prescribed by law
(including extensions of time) for
filing the beneficiary's return of tax
for the taxable year or, if the
beneficiary is not required to file
such a return, the 15th day of the 4th
month of the taxable year following the
taxable year; and]
(i) such distribution is made before
the first day of the sixth month of the
taxable year following the taxable
year, and
(ii) such distribution is accompanied
by the amount of net income
attributable to such excess
contribution. Any net income described
in clause (ii) shall be included in
gross income for the taxable year in
which such excess contribution was
made.
(5) Rollover contributions.--Paragraph (1) shall not
apply to any amount paid or distributed from an
[education individual retirement account] education
savings account to the extent that the amount received
is paid, not later than the 60th day after the date of
such payment or distribution, into another [education
individual retirement account] education savings
account for the benefit of the same beneficiary or a
member of the family (within the meaning of section
529(e)(2)) of such beneficiary who has not attained age
30 as of such date. The preceding sentence shall not
apply to any payment or distribution if it applied to
any prior payment or distribution during the 12-month
period ending on the date of the payment or
distribution.
(6) Change in beneficiary.--Any change in the
beneficiary of an [education individual retirement
account] education savings account shall not be treated
as a distribution for purposes of paragraph (1) if the
new beneficiary is a member of the family (as so
defined) of the old beneficiary and has not attained
age 30 as of the date of such change.
(7) Special rules for death and divorce.--Rules
similar to the rules of paragraphs (7) and (8) of
section 220(f) shall apply. In applying the preceding
sentence, members of the family (as so defined) of the
designated beneficiary shall be treated in the same
manner as the spouse under such paragraph (8).
(8) Deemed distribution on required distribution
date.--In any case in which a distribution is required
under subsection (b)(1)(E), any balance to the credit
of a designated beneficiary as of the close of the 30-
day period referred to in such subsection for making
such distribution shall be deemed distributed at the
close of such period.
(e) Tax treatment of accounts.--Rules similar to the rules of
paragraphs (2) and (4) of section 408(e) shall apply to any
[education individual retirement account] education savings
account.
(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 individual
retirement account] education savings account shall make such
reports regarding such account to the Secretary and to the
beneficiary of the account with respect to contributions,
distributions, and such other matters as the Secretary may
require. 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.
* * * * * * *
Subtitle D--Miscellaneous Excise Taxes
* * * * * * *
CHAPTER 43--QUALIFIED PENSION, ETC., PLANS
* * * * * * *
SEC. 4973. TAX ON EXCESS CONTRIBUTIONS TO CERTAIN TAX-FAVORED ACCOUNTS
AND ANNUITIES.
(a) Tax imposed.--In the case of--
(1) * * *
* * * * * * *
(4) an [education individual retirement] education
savings account (as defined in section 530, there is
imposed for each taxable year a tax in an amount equal
to 6 percent of the amount of the excess contributions
to such individual's accounts or annuities (determined
as of the close of the taxable year). The amount of
such tax for any taxable year shall not exceed 6
percent of the value of the account or annuity
(determined as of the close of the taxable year). In
the case of an endowment contract described in section
408(b), the tax imposed by this section does not apply
to any amount allocable to life, health, accident, or
other insurance under such contract. The tax imposed by
this subsection shall be paid by such individual.
(e) Excess Contributions to [Education Individual Retirement
Accounts] Education Savings Accounts.--For purposes of this
section--
(1) In general.--In the case of [education individual
retirement] education savings accounts maintained for
the benefit of any one beneficiary, the term ``excess
contributions'' means the sum of--
(A) the amount by which the amount
contributed for the taxable year to such
accounts exceeds [$500] $2,000 (or, if less,
the sum of the maximum amounts permitted to be
contributed under section 530(c) by the
contributors to such accounts for such year);
and
[(B) if any amount is contributed (other than
a contribution described in section
530(b)(2)(B)) during such year to a qualified
State tuition program for the benefit of such
beneficiary, any amount contributed to such
accounts for such taxable year; and]
[(C)] (B) the amount determined under this
subsection for the preceding taxable year,
reduced by the sum of--
(i) the distributions out of the
accounts for the taxable year (other
than rollover distributions); and
(ii) the excess (if any) of the
maximum amount which may be contributed
to the accounts for the taxable year
over the amount contributed to the
accounts for the taxable year.
(2) Special rules.--For purposes of paragraph (1),
the following contributions shall not be taken into
account:
(A) Any contribution which is distributed out
of the [education individual retirement]
education savings account in a distribution to
which section 530(d)(4)(C) applies.
(B) Any rollover contribution.
* * * * * * *
SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.
(a) * * *
* * * * * * *
(c) Prohibited Transaction.--
(1) * * *
* * * * * * *
(5) Special rule for education [individual
retirement] savings accounts.--An individual for whose
benefit an education [individual retirement] savings
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 section 530(d) applies with respect to such
transaction.
* * * * * * *
(e) Definitions.--
(1) Plan.--For purposes of this section, the term
``plan'' means--
(A) * * *
* * * * * * *
(E) an education [individual retirement]
savings account described in section 530, or
* * * * * * *
Subtitle F--Procedure and Administration
* * * * * * *
CHAPTER 61--INFORMATION AND RETURNS
* * * * * * *
Subchapter A--Returns and Records
* * * * * * *
PART III--INFORMATION RETURNS
* * * * * * *
Subpart A--Information Concerning Persons Subject to Special Provisions
* * * * * * *
SEC. 6050S. RETURNS RELATING TO HIGHER EDUCATION TUITION AND RELATED
EXPENSES.
(a) * * *
* * * * * * *
(e) Definitions.--For purposes of this section, the terms
``eligible educational institution'' and ``qualified tuition
and related expenses'' have the meanings given such terms by
section 25A (without regard to subsection (g)(2) thereof), and
except as provided in regulations, the term ``qualified
education loan'' has the meaning given such term by section
[221(e)(1)] 221(d)(1).
* * * * * * *
CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE
PENALTIES
* * * * * * *
Subchapter B--Assessable Penalties
* * * * * * *
PART I--GENERAL PROVISIONS
* * * * * * *
SEC. 6693. FAILURE TO PROVIDE REPORTS ON CERTAIN TAX-FAVORED ACCOUNTS
OR ANNUITIES; PENALTIES RELATING TO DESIGNATED
NONDEDUCTIBLE CONTRIBUTIONS.
(a) Reports.--
(1) * * *
(2) Provisions.--The provisions referred to in this
paragraph are--
(A) * * *
* * * * * * *
(C) section 529(d) (relating to qualified
[State] tuition programs), and
(D) section 530(h) (relating to education
[individual retirement] savings accounts).
* * * * * * *
VII. DISSENTING VIEWS
It had been our hope that expanding educational
opportunities for our children is an issue where the Committee
could set aside its partisan differences and work together.
There are many other issues on which we can campaign this fall.
The fact that Congressman Rangel and Congresswoman Nancy
Johnson reached across the partisan divide to formulate a
bipartisan school construction bill gave credence to those
hopes. The Committee markup on this bill and the fact that the
markup was called by the Chairman under orders from the
Republican House Leadership indicates that those hopes were
unrealistic. The House Republican Leadership's strategy is
clear. In the area of expanding educational opportunities, they
will seek partisan confrontation and vetoes rather than
bipartisan accomplishment.
The Committee bill contains several provisions for which
there is broad bipartisan support. Those provisions include
liberalizing the student loan interest deduction and expanding
access to prepaid tuition programs for higher education. Rather
than include those provisions in a bill designed to become law,
the Committee voted to include those provisions in legislation
deliberately designed to be vetoed.
The President is correct in his adamant opposition to the
so-called ``Coverdell'' provision included in the Committee
bill. He has vetoed it twice before and will do so again if
presented to him in future legislation. It is a diversion of
scarce resources that could be used to improve the public
schools--where 90 percent of our students are educated. It does
nothing for families currently struggling with the cost of
educating their children. It will benefit only a few wealthy
families with income available to save after meeting the costs
of their children's education. The Joint Committee on
Taxation's analysis indicates how small the benefit will be
under this provision. It estimates that after 5 years the
average family with children in public schools will receive an
annual benefit of $7 and the average family with children in
private schools would receive an annual benefit of $37.
The Committee bill is deficient in its failure to include
meaningful school construction and modernization provisions.
The Republicans have made two seemingly inconsistent arguments
against bipartisan school construction and modernization
legislation sponsored by Congressman Rangel and Congresswoman
Nancy Johnson. First, they argue that public school
construction and modernization is strictly a local
responsibility. Then they argue that their bill has meaningful
subsidies to assist state and local governments in meeting the
cost of school construction. Those arguments are actually not
inconsistent. The school construction provision in the
Committee bill will do nothing for school districts with
students in trailers or in unsafe school buildings. The
Committee bill provision modifies the current law arbitrage
rules and provides tax benefits to school districts that are
able to delay school construction and renovation for more than
2 years. The longer those districts delay school construction,
the greater the benefit they would receive under the Committee
bill. It is difficult to conceive of a proposal that is less
responsive to the real need that exists.
Benefits limited to families with wealth
We recognize that opposing a proposal advertised as
promoting school choice is not an easy vote for some Members.
Those Members should examine the substance of the Committee
bill. If the Committee bill promotes school choice, it does so
only for a small category of wealthy families.
1. The only families who would benefit from the legislation
are families with sufficient investment assets to enable them
to accumulate income on those assets over a long period of
time. Families paying educational expenses out of wage and
salary income would receive no benefit under the Committee
bill--no matter where those children were schooled.
2. Families with school-age children would receive little
benefit. If a family currently has a child in private school,
that family would receive the full benefit of the Committee
bill only if it could contribute $2,000 to an investment
account after paying the current-year costs of the private
school. With private-school costs averaging over $3,000 per
year, only a few very fortunate families could afford to make
such a contribution. In addition, the Committee bill would
provide substantial benefits only if the money were allowed to
accumulate in the account over a period of years. Therefore,
even the few fortunate families able to save for next year's
tuition costs would receive little benefit.
3. To receive the maximum benefit, a family would need to
have both young children (so that there is time to accumulate
income in the account) and substantial investment assets. The
following table indicates that few families meet the second
requirement. The table is based on data collected by the
Federal Reserve Board in its 1998 Survey of Consumer Finances.
It shows the median amount of non-retirement investment assets
held by families in various income categories. Non-retirement
investment assets include checking accounts, savings accounts,
and all other financial assets not held in a retirement plan.
Not surprisingly, it shows that young families and families
with children have relatively small amounts of non-retirement
investment assets.
----------------------------------------------------------------------------------------------------------------
Median amount of non-
retirement investment assets
Percent of -------------------------------- Families with
families in Families children under
Income category income headed by 18 years of
category All families individual age
under 35 years
of age
----------------------------------------------------------------------------------------------------------------
Less than $10,000............................... 12.9 $300 $400 $100
$10,000 to 20,000............................... 16.4 1,800 510 400
$20,000 to 30,000............................... 15.5 4,330 950 1,200
$30,000 to 40,000............................... 12.6 6,520 1,800 2,690
$40,000 to 50,000............................... 9.1 9,500 4,100 4,600
$50,000 to 75,000............................... 17.4 17,000 7,750 11,820
$75,000 to 100,000.............................. 7.6 31,850 13,900 24,000
$100,000 to 200,000............................. 6.1 96,630 49,300 83,000
Over $200,000................................... 2.3 520,000 78,050 372,500
----------------------------------------------------------------------------------------------------------------
We believe that the table above amply demonstrates which
families will benefit from the Committee bill. The amount of
non-retirement investment assets is a very good measure of a
family's ability to take advantage of the Committee bill.
Without those assets, a family would have to save out of
current-year wages $2,000 per year, per child to take full
advantage. We all know how few families can afford to do this.
Administerability
From a technical standpoint, the Committee bill is so
flawed that it is an embarrassment. The committee bill is based
largely on a Senate Floor amendment that was offered by Senator
Coverdell during the consideration of the recently enacted
Taxpayer Relief Act of 1997. Like many Senate Floor amendments,
Senator Coverdell's amendment appears to have been developed
with some haste, largely for political purposes, and with
little regard to whether it actually could be administered.
Notwithstanding the fact that almost three years have passed
since the original consideration of Senator Coverdell's
amendment, that still is an accurate characterization of the
bill reported by the Committee.
The Committee bill would permit taxpayers to contribute
$2,000 per year, per beneficiary to education savings accounts.
Income from assets in those accounts would accumulate on a tax-
free basis and that income would be exempt from tax if used to
pay qualified elementary and secondary education expenses of
the designated beneficiary. The bill defines qualified expenses
as being (1) expenses for tuition, fees, academic tutoring,
special needs services, books, supplies, computer equipment
(including related software and services) and other equipment,
incurred in connection with the enrollment or attendance of a
child at an elementary or secondary school, and (2) expenses
for room and board, uniforms, transportation, and supplementary
items and services required or provided by an elementary or
secondary school in connection with enrollment or attendance at
such school. The bill provides no hint as to how to how the
Internal Revenue Service is to administer such a provision or
what specifically is included in the broad definition of
qualified expenses. The technical flaws of the bill were
convincingly demonstrated during the Committee markup.
The Committee bill appears to provide a long list of
potentially tax deductible Christmas presents for the children
of wealthy families, including computers, computer software
(hopefully not including games), books, educational videos,
backpacks, art supplies, athletic equipment, and many other
items. A parent could realize tax benefits by paying one child
to tutor another child as long as the parent contends that the
tutoring is academic. Even after 3 years of working on the
bill, the issue of whether taxicabs or other transportation
expenses are covered could not be explained by the staff during
the Committee markup.
The bill purports to limit the availability of education
savingsaccounts to taxpayers with annual incomes of less than
$95,000 ($160,000 for joint returns). However, a wealthy taxpayer
easily could avoid this limitation through the simple expedient of
making a gift to the taxpayer's child, who would then make the
contribution to the education savings account. In a prior markup, the
staff of the Joint Committee responded that the bill would permit such
an avoidance technique as long as the child earned less than $95,000.
In a classic understatement that created laughter in the audience, the
staff described the bill's income limitation as being ``porous.''
Bipartisan School Construction Alternative
We believe that we cannot expect our children to learn or
our teachers to effectively teach unless they are provided with
a safe and modern school building. Forcing students to go to
school in trailers or dilapidated school buildings is a clear
message to them that they and their education do not matter.
Currently, our public school system has extraordinary unmet
needs for funds to construct and modernize schools. New
estimates, based on data collected by the State Departments of
Education, indicate that more than $300 billion will be needed
to repair or replace existing public school facilities and to
construct new schools for the so-called ``baby boom echo''
effect. That $300 billion need cannot be met without a
significant commitment of funds from all levels of government,
including the Federal government.
Congressman Rangel and Congresswoman Nancy Johnson, working
together, have developed bipartisan legislation that would make
a meaningful down payment for school construction and
modernization. Their proposal would provide $24.8 billion in
interest-free funds over the next two years for school
construction and renovation projects.
The bipartisan school construction proposal would in no way
impede on local control of the public school system. All
decisions regarding what schools to build or renovate would be
left to local school districts. The Federal contribution under
the proposal would be provided under procedures similar to
those utilized in providing the current law tax-exempt bond
subsidy. The Federal role in the proposal would be limited to
making an initial allocation of the volume limitations among
the States.
The bipartisan compromise is a cost-effective approach that
would leverage nearly $25 billion in school repairs and new
construction, while avoiding the creation of any new level of
bureaucracy. The cost of the bipartisan compromise is less than
the cost of the Coverdell provisions and the meaningless school
construction proposal contained in the Committee bill.
It is our hope that the bipartisan compromise will be made
in order when the Committee bill is considered on the Floor.
Adopting the bipartisan compromise, would be a first step in
enacting bipartisan legislation to expand educational
opportunities.
Charles B. Rangel.
Ben Cardin.
John Lewis.
Richard E. Neal.
William J. Jefferson.
Karen L. Thurman.
Xavier Becerra.
Michael R. McNulty.
Pete Stark.
Robert T. Matsui.
William J. Coyne.
Sander M. Levin.
John Tanner.
Jerry Kleczka.
Jim McDermott.