A bill to amend the Internal Revenue Code of 1986 to provide for the establishment of, and the deduction of contributions to, education savings accounts and, in order to compensate for the loss in Federal revenues by reason of such accounts, to restrict the deduction for home mortgage interest.

Amends the Internal Revenue Code to allow an individual taxpayer an income tax deduction for cash contributions to a savings account established to pay the educational expenses (tuition, supplies, meals, and lodging) of a dependent at an institution of higher education or a vocational school. Limits the amount of the deduction to the lesser of $1,000 or the earned income includible in the taxpayer's gross income for the year. Disallows the deduction for contributions to an account maintained for any individual who has attained age 19. Provides that: (1) no account may have more than one beneficiary; and (2) no individual may be a beneficiary of more than one account.

Permits the exclusion from gross income of payments and distributions from an education savings account as long as such amounts are used exclusively for the educational expenses of the eligible beneficiary or are distributions of excess contributions before the due date of the tax return. Exempts the accounts themselves from taxation (except for the tax on unrelated business income of a charitable organization) unless they cease to be proper education savings accounts because either the contributor-taxpayer engages in prohibited transactions or the account's beneficiary pledges the account as security.

Imposes penalties in the form of additional tax when account funds or distributions are used for other than educational purposes.

Requires that the trustee of an education savings account report to the Secretary of the Treasury and to the account's beneficiary on the maintenance of the account.

Extends the deduction for contributions to an educational savings account to taxpayers who do not otherwise itemize deductions.

Imposes a six percent excise tax on excess contributions to an education savings account.

Provides that contributions to the account shall not be subject to gift tax.

Imposes a five percent excise tax on amounts connected with any prohibited transaction with respect to an education savings account.

Imposes a penalty for failure to file required reports.

Excludes from the gross income of an individual any distributions from an education savings account used exclusively for that individual's educational expenses.

Revises the definition of "qualified residence interest" for purposes of the income tax deduction for personal interest to distinguish between acquisition indebtedness and home equity indebtedness. Limits to $500,000 and $75,000 respectively the amount of indebtedness on which interest is deductible. Provides that for purposes of this deduction a boat or a mobile home used on a transient basis shall not be treated as a qualified second residence of the taxpayer.