Employee tuition waiver for graduate studies taxable?

[keppa]

I received a full-time employee tuition waiver for my graduate studies at my college. The full amount of the waiver is shown in box 5 of the 1098-T. TurboTax reduces my returns when I enter this information. Shouldn't this waiver be tax-free since it's under the $5250 threshold for I.R.C. § 127(a)?  What should I do?

[LinaJ2020 · Accepted solution]

The waiver amount is treated as tax-free only if it is shown to cover your tuition amount.  If there is no tuition amount shown in box 1 on your Form 1098-T, the waiver amount will be considered as a taxable event, thus reduces your tax refund. 

Technically, the school may have reported the incorrect information on your Form 1098-T.  The waiver amount should not be considered as the scholarship.  If the school did not report any tuition amount in box 1 but report the waiver amount as a scholarship in box 5, it is showing you are receiving a scholarship that is not used to pay for any of your tuition. Therefore, you will be paying taxes on this waiver amount.  

Usually, the scholarship is treated as a nontaxable event only if it is used to cover all or part of any qualified education expenses including the tuition amount, books or supplies.  If there is no tuition amount being reported in box 1, the waiver amount in box 5 will be taxed.  

Here is the workaround:  If the waiver amount covers the full amount of your tuition paid, ( in other words, you did not pay any tuition out of pocket), what you can do is to adjust your Form 1098-T by entering the same number of the waiver amount in box 1, to show this is an offset, that the waiver amount is used to pay off the tuition amount.

If the waiver amount covers only part of the tuition paid, you would add the waiver amount to the tuition amount that is already reported in box 1 to show the waiver is used to pay part of the tuition amount. 

I am attaching a screenshot to show how you can adjust the amount in box 1 on Form 1098-T replica.