A working student.
If you're lucky enough to have a job with an employer that is will to help you increase your education, it's well worth the time and effort to take advantage of the opportunity. There are still many employers in mid and large-size companies that will fully or partially reimburse your tuition costs if you get an additional certificate or degree while working. It's a win-win situation, but it does have tax ramifications you should be aware of.
What Tuition Reimbursement Is
According to Allbusiness.com, when an employer is willing to pay for part or all of your higher education tuition cost this is tuition reimbursement. Many working adults have gained additional skill-sets and opened their careers into new fields by taking advantage of tuition reimbursement programs with their employers.
Most of the time the employer expects the employee to pay the cost up front. The reimbursement is conditioned upon successfully completing the education program or a set of classes. This is proven by producing official school transcripts, or a copy of the program certificate or degree to the employer.
Tax Treatment
Because tuition reimbursement is paying you for a cost you incur for your employer, technically it is not considered a profit or income to you. As a result, the money you received from your employer to replace your funds for costs is not reportable to federal or state income tax authorities. That said, the entire payment needs to be a reimbursement only. Any amount that is paid as a bonus or above your original school costs would be income and then reportable on your income taxes.
Further, the amount of tuition reimbursement that is not taxable is capped. Congress limited the tuition reimbursement exclusion to no more than $5,250 annually per person which is specified in Section 127 of the U.S. Internal Revenue Code.
Defending Your Costs
The best way, according to Nolo Press - a legal expert guide source - to prove your education expenses exist for tax purposes is to keep copies of all your school costs. You should get receipts for your tuition payments, book purchases, and any other fees for registration and class needs. All of these can be eligible for reimbursement, depending on how much cost your employer wants to cover. This also helps defend that your reimbursement is just that later on when you can show the Internal Revenue Service (IRS) or state tax authority that the payment you received is equal to or less than your receipts in total for school. Finally, keep copies of all your payments and paperwork from your employer related to tuition reimbursement.
Limited to Higher Education
Most employer tuition reimbursement programs are limited to higher education college programs or skill-training secondary schools. Rarely do employers reimburse high school costs if at all. In addition, various employers may require additional criteria be met such as the school must be accredited or the program must be immediately beneficial to the company. An example of employer criteria can be see on the California Institute of Technology's website (http://hr.caltech.edu/policies/PM/PM15-15.htm). For example, many employers will support accounting programs, but few will have a need for veterinary training.
Responding to an Audit
If you are audited by the IRS or your state tax agency, you should respond as soon as is reasonably possible. Do not ignore the audit or try to avoid it. Delay can result in penalties or worse. Instead, make sure to bring a copy of your income tax filings for both federal and state taxes, and bring all your paperwork and receipts that you used to prepare them. Make sure to have a full copy of everything in a file at home so if you have to hand something over you always have a 2nd copy for your records.
Answer each question truthfully and show your proof of calculations with your receipts and worksheets. If you had someone prepare your taxes, make sure they come with you to the audit (that service is usually included in your tax preparation fee). Per Nolo Press, don't make the IRS guess; provide the answers for them.
A Tax Benefit for Employers
Employers get a tax impact from offering tuition reimbursement as well. Fortunately, the employer's tax impact is a positive one; employers can use the tuition reimbursement as a business expense and a deduction when calculating the business taxes owed. See the University of Texas CRS Report cited below for more details (Page: CRS-2).
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