Many employers offer tuition reimbursements for under-educated employees interested in qualifying for better-paying jobs or learning more about specific job-related skills or techniques. Unfortunately, relatively few employees take advantage of these benefits.
This is partially the fault of employers. While most American businesses receive generous subsidies and tax breaks to provide tuition assistance for certain employees, many companies simply don’t publicize these educational opportunities. In other cases, the fault may lie with employees who prefer not to “work” over time to learn new skills. Workers with grueling jobs often have little appetite for demanding night classes that can meet three or four times per week.
How Do I Reflect This On My Tax Return?
If you’ve taken advantage of your employer’s tuition reimbursement program and received a Form-1099 to account for this extra “income,” you’ll need to keep a few things in mind. First, the reimbursements that you received through your employer’s program count as “unearned income” for tax purposes. “Unearned income” is reported on line 21 of your Form 1040.
In addition, you can add the full value of each credit that you took under your employer’s plan to the “Lifetime Learning Credit” to which each taxpayer is entitled. This is a tax credit designed to offset tuition payments associated with stand-alone higher-education classes taken outside of the purview of a traditional degree program. However, this credit may also be used to offset the cost of credits taken within certain “continuing-education” degree programs as well. If you’re over a certain age, it’s likely that you’ll be able to claim all of your education costs under this credit.
In certain circumstances, you may be exempt from paying any reimbursement-related taxes. Depending upon the amount of educational assistance that you received from your employer, the IRS may consider this unearned income to be completely tax-free. The federal limit for such a tax-free reimbursement designation fluctuates from year to year. As of the most recent tax year, this limit was set at about $5,500.
If your employer designates the tuition reimbursement as an “employee benefit” of your position, it may also be exempt from taxation. Such a benefit might be included in your employment contract or in the “employee handbook” that you received at your post-hiring orientation session. In order for the IRS to accept this “employee benefit” designation, you and your employer will have to prove that the instruction that you received either maintained or enhanced your job-related skills base.