The answer to this matter is not quite black and white; although in many cases it is not. It may, however, be considered as such in some situations. To make sure they or their families don’t fall afoul of the IRS, students should educate themselves about the relevant tax codes. Asking the tuition assistance provider, whether it be an employer or school, about tax liability is a good place to start. Don’t take their word for it, though: the student, not the provider, will be on the hook for unpaid taxes in the event of any error.
Employer Tuition Assistance Programs
Tuition assistance benefits from employers are generally designed to avoid placing any tax liability on the employee. These programs are a popular benefit, and are used for everything from children’s college education to graduate education. According to section 127 of Internal Revenue Code, employees may receive up to $5,250 from their employers without incurring tax liability. Employees can use these benefits to pursue undergraduate or graduate degrees, and need not be degree seeking. Graduate education was granted this status in 2001, and the benefit has since become very popular among MBA students.
There are some limits on tuition assistance. The money must be spent on tuition, fees, books, and other college-specific supplies. It must also be spent on the employee’s own education.
Note: this means that benefits toward a spouse’s or child’s education are not tax-exempt!
Benefits may not be spent on travel, food, or housing. Courses that involve sports, games, or hobby-type activities are also not exempt in most cases. However, if the course is required as a part of a degree program, or is related to the employers’ business, it may be included in the benefit.
In addition to current employees, retirees, disabled employees, and laid-off workers are all eligible for employee tuition assistance. If a student works for multiple employers offering the benefit, he or she may not combine the offers. The $5,250 limit is a combined total, not a per-employer limit.
In some cases, benefits in excess of $5,250 can still be exempt. In order to qualify, the benefits must have been deductible as a business expense. If the benefits were required by the employer or were used to better skills related to the job, they constitute a fringe benefit, according to the Internal Revenue Code sections 162 and 212.
Many universities and colleges offer their employees tuition waivers. These waivers may be used for undergraduate or graduate education, and are considered tax-exempt.
Many employers and other sources offer tuition assistance. These programs are usually tax exempt, as long as they fall under the 5,250 dollar yearly limit. In some cases, this limit may be exceeded, but it is always prudent to check before assuming benefits are exempt from taxes.