Will I be taxed for employer tuition assistance?
Employer tuition assistance (aka educational assistance) could be taxable. Check whether your employer's program counts as an exception.
As the cost of education rises – and with it student-loan debt – prospective students are looking to spread out the cost of their education among as many individuals and entities as possible.
Tuition support from employers can be a great way to save some money and disperse the total burden. But there are limitations on the amount and type of support your employer can provide.
Why would I want educational assistance from my employer instead of the bank?
If your employer’s educational assistance program qualifies for a tax exemption, then the money you apply to your education will be tax-free.
That raises the real value of the educational assistance when compared to the other benefits your employer can provide, such as income or a gym membership.
Let’s say you receive $1,000 in educational assistance. All of that money can be applied directly to your education. If you received $1,000 from your income, then that income would be taxed, and the education you could buy would be reduced.
That is why educational assistance programs are so powerful and attractive, but there are some restrictions you should know about.
How do I know if my employer’s educational assistance will qualify for tax-exempt status?
Only qualified tuition assistance will be untaxed.
To qualify, the assistance must adhere to the following rules:
- The total exemption allowable is $5,250. All educational assistance above this figure will be classified as a fringe benefit and subject to regular taxation.
- Compensation is limited to reimbursement for tuition, fees and school supplies. Other goods, such as meals, lodging and transportation, cannot be covered by a qualified program. Even school supplies cannot be reimbursed if they are not depleted by the course. Textbooks are the exception to this rule, but a computer would not be covered.
- Unnecessary courses involving sports, games or hobbies do not qualify.
- Graduate-level education cannot be covered unless you also take part in a work-study program.
The total exemption cap can be stretched further. Classes that can be directly applied to your job can be qualified as working condition benefits, which are not subject to the $5,250 maximum.
Generally, degree programs as a whole do not qualify as working condition benefit, but individual courses within a program might.
Your employer should present you with a document outlining your tuition assistance plan for you to sign before your classes begin. The document is also necessary for qualification.