Getting reimbursed for taxes from job-related tuition benefits
January 22, 2014 9:53 AM   Subscribe

My husband is completing his masters degree at the university where he also works. He gets tuition benefits, but any tuition benefit he receives over $5250 per year is taxable. The university treats those taxes as part of the tuition bill (they are about 37%) and we pay them out of pocket. According to our university, we should be able to get reimbursed for the taxes that we paid, given that the tuition counts as a job related expense. How do we do this? Bonus: how do we do this... on TurboTax?

The total cost of tuition for 2013 was 11363, according to his 1098T. Because of the education deduction, the taxable amount was 11363-5250 = 6113. His employer withholds the tax on that amount at 37%, leaving that for us to pay directly to student billing. We paid 2117.50 this year. His employer paid 9127.21. (The remaining 118.29 was a credit on his student account left over from his enrollment deposit in 2012.)

The education (a master's degree) is a job-related deductible expense, so the entire value should be deductible, and we should get back the 2117.50, or at least the federal part of it. (If we show his employer that the IRS accepted it as a job-related expense, they will return the social security, etc. to us.)

How should we input this into the TurboTax system? The tuition and job-related expense sections are different, and we're not sure what to put where.

Obligatory YANMA, YANMCPA, etc. Thank you!
posted by ancient star to Law & Government (14 answers total) 2 users marked this as a favorite
Sorry to be vague, since I don't have this in front of me, but there's a question in TurboTax that asks you how much of the tuition cost was paid for by someone else. I think there are a couple of questions that try to figure out if you've got fellowships/grants, etc., but also things like "is your employer paying for this?" (My husband's employer pays for his tuition.)

It's a little futzy, if I recall, but it's figure-out-able given the questions you're asked. And if it isn't, they have real-time helpers who aren't bad.
posted by Madamina at 10:09 AM on January 22, 2014

OP's husband here.

Unfortunately, the tuition part of the wizard doesn't seem to have any way of taking into account that the education is job-related training, and therefore totally deductible.

We asked the TurboTax people, and they didn't address the "job-related" part of it either. I had some sort of smaller continuing education credit.

Bizarrely, when we left the education part totally blank and called the entire 6K a job-related expense (since that's the amount of the tuition benefit that we were taxed on), it gave us no refund for that section.
posted by supercres at 10:18 AM on January 22, 2014

Hmmm. Well, at the very least, this gives me more to go on, since by rights we should probably be getting that refund, too :P
posted by Madamina at 10:25 AM on January 22, 2014

The original poster wrote: "The education (a master's degree) is a job-related deductible expense, so the entire value should be deductible...". I don't think that's correct. Job-related expenses are deductible, but only when they exceed 2% of your adjusted gross income. See this IRS publication:
posted by alex1965 at 10:33 AM on January 22, 2014

Let me see if I have this correct:

Tuition = 11363
Employer paid tuition = 11363
Taxable amount of employer payment = 6113 [this is included in your wages on your W-2]
Employer withheld taxes on 6113 of income

This is the relevant publication/information. If it was paid under an "accountable plan" then you need a corrected W-2 without the 6113 included in wages; any excess income tax withheld will be refunded with your return, excess payroll tax will need to be refunded by the employer. If a non accountable plan, then you can potentially deduct the amount as work related education, but you don't get a refund of payroll tax. You have to ask your employer what type of plan you have.
posted by melissasaurus at 10:34 AM on January 22, 2014

OK, I've done some more research, and here are two relevant IRS publications that you should probably consult:

As far as I can tell, the amount over $5,250 is probably taxable (despite what your school told your husband), unless your husband needed to take his classes as a condition of keeping his job. It seems a bit of a tricky area, though. Here's a quote from that second publication:


Education. Certain job-related education you provide to an employee may qualify for exclusion as a working condition benefit. To qualify, the education must meet the same requirements that would apply for determining whether the employee could deduct the expenses had the employee paid the expenses. Degree programs as a whole do not necessarily qualify as a working condition benefit. Each course in the program must be evaluated individually for qualification as a working condition benefit. The education must meet at least one of the following tests.

The education is required by the employer or by law for the employee to keep his or her present salary, status, or job. The required education must serve a bona fide business purpose of the employer.

The education maintains or improves skills needed in the job.

However, even if the education meets one or both of the above tests, it is not qualifying education if it:

Is needed to meet the minimum educational requirements of the employee's present trade or business, or

Is part of a program of study that will qualify the employee for a new trade or business.

posted by alex1965 at 11:01 AM on January 22, 2014

I've researched this at length, as I handle the taxability of tuition remission for graduate students at my job. The IRS addressed this in 2002, and identified that tuition remission is different than tuition payment. As a result, the amount over $5250 is always considered a taxable amount, and can not be considered as an education expense. The amount you paid in taxes is not considered to be tuition paid, but rather taxes on a taxable fringe benefit. Even if the degree is considered a job related expense, the tax paid on the fringe benefit is not.
posted by Nimmie Amee at 11:05 AM on January 22, 2014

FWIW, we've been looking at this for guidance so far.

They seem to think that we should be able to get some of this back?

If you’re eligible to deduct the costs of graduate education as a business expense, you might be able to recover some of the withholding. The IRS ruling about eligibility of education expenses as a business expense is in Chapters 11 and 12 of IRS publication #970. If you qualify, you may be able to deduct the total tuition benefit reported as income; you might also be able to deduct the cost of books and travel to school. After you’ve filed your federal tax return and your claim of education as business expense has been accepted, send a copy of IRS Form 2106 to Penn's tax office. This substantiates that your education meets IRS rules for a business expense, and lets you recover the Medicare and Social Security taxes deducted from your tuition benefits.

posted by ancient star at 11:14 AM on January 22, 2014

This would come into play if you are itemizing deductions AND the deduction would be the amount of tuition paid over 2% of your adjusted gross income. Depending on the status of your other deductions, this may by such that the tax implications would be greater to deduct this.
posted by Nimmie Amee at 11:20 AM on January 22, 2014

It seems like it may be a working condition benefit, which doesn't seem synonymous with a condition of keeping my job. It definitely qualifies as maintaining/improving skills related to the job; each class can be justified individually.
posted by supercres at 11:22 AM on January 22, 2014

The IRS ruling here states that tuition remission is not a working condition benefit for tax purposes.
posted by Nimmie Amee at 11:24 AM on January 22, 2014

This more recent memo seems to negate that? I'm no lawyer, though...
posted by supercres at 11:29 AM on January 22, 2014

That's useful, and I hadn't seen it pop up on any of my newsgroups related to this question. Looking at that, you would list the $6113 as a job related expense and not in the tuition related expenses line in terms of how TurboTax works.
posted by Nimmie Amee at 11:41 AM on January 22, 2014

Adding to my above answer, you need to find out if the benefit is:

1. Working condition fringe (accountable plan)
2. Employer's educational assistance program
3. Free/reduced tuition benefit
4. Other reimbursement under nonaccountable plan

The extent of inclusion in income and the deductibility of the payment depends on which category this falls into. It's possible that it's both 1 and 2 or 2 and 4, but it can't be both 1 and 3.

If the amount is includible in income (and thus properly reported on your W-2) it is subject to payroll tax regardless of income tax deductibility.

If the amount was improperly included in income on your W-2 you need a corrected W-2 (there was a rule that allowed them to include it and then you'd deduct it above the line using form 2106....but that was dealing with a retroactive rule 1988).

Let's say it's a combo of 2 and either 1 or 4, since that's what it sounds like. $5250 is automatically excluded from income as part of the educational assistance program, regardless of whether it's related to your job. This should not be included in your W-2 and should not have been subject to any taxes.

The excess, $6113, must qualify as a working condition fringe in order to be excluded from income. If it is a WCF (very fact-specific), then it should not be included in your W-2. If it is not a WCF (for example, if it is paid under a nonaccountable plan), then it will be reported in Box 1 (and maybe box 14) of your W-2 and will be subject to income and payroll taxes.

If it is not a WCF and is included in your W-2, you may be able to deduct it on Sch. A/Form 2106. However, this is subject to a 2% floor and is useless if you don't itemize your deductions. It also does not reduce your payroll tax liability.

Their instructions make no sense. It would require you to include the income, pay taxes on it, file your return with Form 2106 (itemizing your deductions even if it's not advantageous), give them the form, have them refund your (and their) payroll taxes (which requires them filing amended returns), issue you a corrected W-2, and then you'd have to file amended income tax returns. Maybe I'm missing something, since I don't see this issue often, but it sounds like they have no idea what they're doing.

*This does not address any state law issues
posted by melissasaurus at 2:17 PM on January 22, 2014

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