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Is Tuition Reimbursement Taxable?

Instructor: Becky Suhr

Becky has a master's degree in history.

As more companies offer tuition reimbursements to employees, it's important to know whether the reimbursement will be taxed. Read on to see what qualifies a tuition reimbursement to be considered taxable or tax-exempt.

Tuition Reimbursement and Taxes

As education gets more and more expensive, many companies are turning to tuition reimbursement as a way to draw in new employees. In fact, over 68% of companies provide some form of tuition reimbursement. But before an employee takes advantage of one of these programs, it's important to know that tuition reimbursement can, in fact, be taxed.

Nevertheless, in certain cases, tuition reimbursement can be tax-exempt. As of 2016, if an employer provides $5,250 or less in tuition reimbursement annually to an employee, that money is tax-free. Additionally, the employee does not need to claim this money on their W-2.

So, in order to claim this tax-exempt status, the tuition reimbursement must meet the following qualifications:

  • The tuition reimbursement program is a qualified program. This means that the program does not favor highly compensated employees and the owner does not participate in more than 5% of program reimbursements.
  • The tuition reimbursement must not exceed $5,250.
  • The money can only be used towards tuition, fees, and school supplies (including books).

Here are some circumstances where tuition reimbursement might not be considered tax-exempt:

  • If the tuition reimbursement was used to buy supplies that can be kept after completing the course. For example, the money can be used to buy notebooks, but not a printer or a laptop computer. Textbooks are the exception to this rule.
  • If the classes consist of playing sports, games, or hobbies. These classes will not be covered by tuition reimbursement, unless the class is related to the business or is a required part of the degree program. However, beyond these stipulations, classes do not necessarily need to be related to the student's work to be covered.
  • If the amount exceeds the federally allowed tax-free maximum. Any money above $5,250 (as of 2016) is considered a fringe benefit, and must therefore be claimed on the employee's W-2. So, if the employer provides $6,000 in tuition reimbursement, then the first $5,250 will be tax-free, while the remaining $750 will be taxed.
  • If the employee is enrolled in graduate education. Graduate classes will only be considered if the employee is also involved in a work-study teaching or research position.

Tuition Reimbursement as a Fringe Benefit

As stated above, any amount of tuition reimbursement that exceeds $5,250 is considered a fringe benefit of the job, and the employee will have to pay taxes on that amount. However, if an employee is taking a class related to their job or career, they can declare that their tuition is a work-related expense, thus making it tax-exempt. However, the employee should be prepared to prove that each class they take helps them improve at their job and benefits the company. Otherwise, the money will be considered taxable income.

Other Affordable Options for Education

Tuition reimbursement can help a student pay for their education, but in many cases the federally allowed tax-free maximum will not be enough to cover the cost of an entire year of academic study. So, what are some other affordable education options that are available to students?

Study.com can provide students with a number of online education resources, including credit-granting courses that can award users actual college credit that is transferrable to over 2,000 colleges and universities nationwide. These online courses can be customized to fit the user's specific needs and can be completed for a much lower cost than traditional on-site education.

Learn More about Tuition Reimbursement

Still have questions about tuition reimbursement? Learn how to get tuition reimbursement, how tuition reimbursement works, and how tuition reimbursement works with financial aid with these articles on Study.com:

How to Get Tuition Reimbursement

How Tuition Reimbursement Works

How Tuition Reimbursement Works with Financial Aid

Click here to see a full list of Study.com's courses. To find out if Study.com might be the right education option for you, reach out to us at sales@email.study.com

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