Tax Tip of the Week: Understand Your Education Benefits

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Isn’t it great when your employer subsidizes your higher education? Education is a wonderful benefit if you can get it and turning in that reimbursement form may feel great, but many employees are surprised when they find at the end of the year that they have been taxed for the value of tuition reimbursements.

Employees are hunkering down to save their jobs, or try to get their resumes in order in case they are victims of the wave of layoffs. Many are looking to increase their market value with more education, and that education isn’t cheap. Take an MBA for example. If you want to get an online or traditional MBA it’s going to cost a minumum of $20,000. Anything your employer reimburses over $5,250 in a calendar year is considered taxable income.

Ouch.

The good news is that up to $5,250 of the assistance is totally tax free so long as your employer has a written  educational assistance policy in place. The assistance can be spent on tuition, fees , books, supplies, and equipment for undergraduate- or graduate-level courses and the course don’t have to be work-related. The only things you can’t use the assistance for are meals, lodging, and transportation.

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If your employer shells out more than $5,250, you will see the amount over this figure in Box 1 of Form W-2 and you must include it in income.

The Loophole

There is a way around the $5,250 threshhold, but as an employee you probably have little influence over it. Benefits paid under the working condition fringe benefit can exceed $5,250 IF the benefit is one which, had you paid for it yourself, you could deduct as an employee business expense. (If it’s something you MUST do to maintain your current job.) This type of plan is allowed by Section 132(d) of the IRS code. Your human resources department should be familiar with this and can let you know what type of plan you have.

If the benefits over $5,250 also qualify as a working condition fringe benefit, your employer does not have to include them in your wages.

Easing the Pain

Many employers pay only a portion of the tuition. The portion of tuition you pay will probably qualify for the Lifetime Learning Credit. This credit is equal to 20% of the out of pocket expenses up to $10,000, allowing a maximum credit of $2,000.

Image Credit: blmurch, Flickr