Federal Tax Rules on Tuition Reimbursement

Tuition reimbursement can be an attractive job perk. In addition to salary and benefits, your employer offers to pay for at least part of the cost of your college education. Whether you’re pursuing a bachelor’s degree, master’s degree or Ph.D, that reimbursement could come in handy. There’s some confusion about the Tax Cuts and Jobs Act, which eliminated your ability to claim a tax deduction for any unreimbursed employee business expenses. But if your employer reimburses you for the expense, it’s nontaxable up to a certain limit, as always.

If tuition reimbursement is one of your job perks, your employer can cover up to $5,250 in tuition costs per tax year without taking taxes out on that income. You’ll see this on the Form W-2 your employer gives you at the start of tax season. Your employer can reimburse you for more than $5,250, but that amount will be taxed as ordinary income. Even if you work as an independent contractor or business partner, your qualifying tuition expenses can be reimbursed up to $5,250 without taxation.

In order to satisfy the tuition reimbursement limit for 2018, though, the reimbursements must be set up through a qualifying educational assistance program. The courses you take don't have to be related to pursuing a degree, but each course must be connected to performing your job. You should save documentation that proves that you paid for the course and were reimbursed for it.

If you’re looking into tax savings in the form of an education deduction, it’s important to know there are requirements. If you get your W-2 and you see the full amount listed as taxable income, the types of courses you took may have made your tuition reimbursement taxable. Although your employer can reimburse you for tuition, fees and school supplies, if any of those supplies can be used after the class, they won’t be tax-exempt. Also, the courses must be at the undergraduate level unless you’re involved in work-study teaching or research.

If your employer didn’t reimburse you for the cost of your education expenses, though, there is a complication for the 2019 filing season. The Tax Cuts and Jobs Act eliminated unreimbursed employee expenses, so you’ll no longer be able to take an education deduction under miscellaneous expenses. Before the new tax laws, you could claim miscellaneous expenses as long as they amounted to more than 2 percent of your adjusted gross income. So that business degree you were pursuing to make yourself better at your job could be claimed as a miscellaneous deduction.

The changes to the tax law are designed to simplify things for taxpayers. Instead of having you itemize every expense, the laws are designed to simply give you a much higher standard deduction, which would be hard to exceed anyway. For individuals, the standard deduction is now $12,000, and it’s $18,000 for those claiming head of household status and $24,000 for married couples filing jointly. This will offset any benefits you might have lost by claiming an unreimbursed education deduction.

If you’re still filing taxes for the 2017 tax year, the same IRS tuition reimbursement limit for 2018 applies. However, in addition to the fact that your tuition reimbursement isn’t taxable, you can also claim deductions for any unreimbursed tuition expenses you had during the tax year. The courses you took will need to be related to your job, which means if you’re taking courses to qualify you for a promotion or job change, you can’t claim them. You can deduct the cost of any tuition, books, supplies, lab fees and similar items as long as they exceed 2 percent of your gross adjusted income.