Taxes Incorrectly Withheld for Tuition Benefit

[trickolas]

In 2018, I went back to school while working full time and my employer provided me with tuition assistance through "tuition remission." They paid off my tuition bill and I subsequently saw the tuition amount on my paycheck and had 43% of it withheld as taxes. Late-2019, I realized that my education is actually considered job-related, and as per the IRS, the tuition amount should be non-taxable. I spoke with an accountant at H&R Block and he said that I should speak with my employer to have my 2018 W2 and 2019 W2 corrected (the tuition benefit amount removed from Box 14 - Other). This way, I can have all the taxes that were withheld for tuition returned through my refund in these respective years (it's nearly $10000!). I called my finance department and they seem reluctant to make changes to the W-2, saying that my tuition amount SHOULD be withheld via taxes.

I tried explaining to the finance department that my tuition amount was incorrectly withheld because historically in 2018 and early 2019, I wasn't able to claim my education as job-related. In late 2019 in the most recent semester, I had an option to request tuition benefit and answer several tax questions -- one of these was if my courses are job-related. I marked "Yes" and I am now receiving the tuition benefit without any tax consequences.

Any advice on how to proceed with getting my taxes returned to me for 2018 and 2019?

[LindaB1993]

I recommend that you file an amended return and indicate that the tuition reimbursement is nontaxable.

You won't be able to amend your return in TurboTax Online or on a mobile device. You'll have to install the TurboTax download software on your computer.

1. Sign in at TurboTax.com with the user ID you used when you filed your 2018 return. 
2. Select Show next to Your tax returns & documents.
3. Select Download .tax fIle. You'll need this to amend your return.
   • .
4. Once you've got your .tax file, select 2018, and then select Amend (change) 2018 return.
5. In the expanded instructions, select download TurboTax Desktop 2018.
6. Install the TurboTax 2018 software.
7. Now open your .tax file in the TurboTax 2018 software by choosing File and then Open Tax Return (Windows) or TurboTax and then Open Tax Return (Mac). Browse to the location of your tax file and select Open.
8. You're ready to amend your 2017 return. 

[trickolas]

Hi Linda,

Will I need to speak with my employer about correcting my W-2 for 2018 and 2019? Both of the W-2 shows in Box 14 "Other" that I had a taxable amount withheld (tuition amount). Since my education is not taxable, I believe I will need my W-2 corrected and have that amount removed from Box 14. What are you thoughts on this and how should I approach my employer about this?

Thanks in advance!

[LindaB1993]

This is probably something that you may want to clarify with your employer to be sure. Did the amount exceed $5250?

By law your employer can only give you $5250 maximum, tax free. If your tuition was less than that, and you employer reimbursed it all; it’s safe to assume it does not need to be reported. You do not even need to enter your 1098-T if you have one. You have nothing to claim.

 If you got more than $5250, the amount above $5250 is usually already included in box 1 of  your w-2, as income.  Since you have essentially paid tax on that part, it  is considered your after tax money and that amount can be used  to claim the tuition credit.

If your tuition reimbursement is $5,250 or less, your employer should not include it on your W2 and you do not have to pay taxes on it. If your employer reimburses more than the $5,250 limit, they should include the overage in your wages on your W-2 and you will pay taxes on it.

As of 2016, if an employer provides $5,250 or less in tuition reimbursement annually to an employee, that money is tax-free. Additionally, the employee does not need to claim this money on their W-2. ... The money can only be used towards tuition, fees, and school supplies (including books).

[trickolas]

Hi Linda,

Yes, the tuition benefit did exceed $5,250. However, this should only apply to tuition benefit for coursework that is not "job-related." Per my employer's policy to receive the benefit, I received this note:

“Under IRS regulations, up to $5,250 per year of graduate Tuition Remission benefits for employees are non-taxable. This means the first $5,250 of your graduate tuition costs will not be taxed. Anything over $5,250 will be considered taxable income, and the tax on the value of the benefit will be withheld from your paycheck. If the graduate level course work is job-related, it will be excluded from taxable income.”

Currently in 2020, I received the same tuition benefit for my schoolwork, but now I am able to claim it as job-related. As a result, I do not have any taxes withheld for the tuition benefit. My main question is if I can retroactively amend my 2018 taxes to have my withheld taxes refunded back to me. I am trying to make the argument that I incorrectly paid taxes in 2018 (and 2019) for coursework that was actually job-related, but was incorrectly claimed as not-job-related. 

Thanks!

[MisterAnt]

Hi Trickolas,

I have a similar situation to you such that my employer is considering my education assistance as ordinary income for benefits exceeding $5250. They are currently covering my graduate expenses that is "relatable course-work". You mentioned in 2020 you were able to claim it as job-related, did you do this on your 1040 tax return or did you employer fix it on your W-2 form?If you did it on you 1040 tax return, where did you put the deduction?

Thanks for the help!

[bruins_riley12]

Hi @MisterAnt, @trickolas, and @LindaB1993 

I was wondering if you ended up changing the W-2 box 1 amount directly or if you put it as a deduction? My college is unable to provide guidance or reissue the W-2 as they state that the college opts to not determine whether coursework directly relates to the job responsibilities. Would you just change that number and have the documentation required in case there is a question about it?

[Hal_Al]

The previous discussion on this thread is essentially "off track".  There is no exclusion, from taxation, of employer reimbursement for work related tuition.  Employers are allowed to set up a qualified tuition reimbursement plan for any education (graduate, undergraduate or trade school; work related or not work related) at eligible institutions.  The first $5250 is tax free and is not to be included in box 1 of the employee's W-2.  Your employer's plan must meet IRS regulations.

Bottom line: there is no way to file your tax return to "undo" what your employer reports on your W-2.  If your employer reported the reimbursement as income, then it is taxable income.  If he made a mistake, a corrected W-2 is the only remedy. 

If the education was work related, the employee was allowed (prior to 2018) to claim an itemized deduction, subject to the 2% of AGI rule.  But starting in 2018, job expenses, including education, are no longer deductible. The $5250 tax free tuition reimbursement is still allowed. 

[Carl]

Here's why I can not see you getting a corrected W-2 for 2019.

The fact is, your employer paid the employer side of taxes on your income, to the IRS. (referred to as the self-employment tax by some business owners, depending on the type of business.)  There is nothing that will change that fact after Dec 31, 2019.  That is, unless the employer is willing to file an amended tax return for the business for 2019. For a business with a large number of employees, I don't see that happening for the benefit of just one single employee. Doubtful, but not impossible.

I would think the employer woud be able to "correct" the situation with your 2020 income somehow, so that you would get the credit for the $5250 of tax free income on your 2020 tax return, that you "should" have got credit for on the 2019 return. Hopefully it's possible to do that without affecting your $5250 tax free credit on the 2020 tax return also. Actually, it would be on the employer's tax return, not yours. If possible, the amount in box 1 on your 2020 W-2 would be reduced by $5250 for the 2019 tax year, and another $5250 for the 2020 tax year. I have no clue if that's even possible though, as a corrective measure. But maybe my bringing it up will turn on a lightbulb over someone's head with a "real" helpful response.

[bruins_riley12]

Thanks for clarifying @Carl and @Hal_Al. To confirm, my employer (a college) who provides me graduate tuition benefit that relates directly to my job will only be tax-free up to $5,250 because of changes in the rule that affected being able to deduct those amounts effective for filing year 2018.

The W-2 does not include first the $5,250, but my college did state: "has elected to not make the determination on whether or not a course is job related and will include all tuition remission greater than $5,250 in wages.  Employees that deem the courses related to their job may deduct the corresponding amounts from taxable income when filing taxes." so this is outdated guidance from my employer then?

[Hal_Al]

Q. So, this is outdated guidance from my employer then?

A. Yes

Q.  Will only be tax-free up to $5,250 because of changes in the rule that affected being able to deduct those amounts effective for filing year 2018?

A.  Not exactly.  Only $5250 will be tax free, but not because of the rule change.  $5250  was the tax free limit before and after 2018. The two issues are not related.

Tuition remission/reduction for employees of a college are treated differently than a tuition reimbursement plan of a regular employer. The $5250 limit does not apply.  The rules are different for graduate and undergrad tuition. See chapter 1 of IRS Publication 970.  But, the bottom line still is: if it's in box 1 of your W-2; it's taxable. 

[bruins_riley12]

Thanks Hal, thank you for your response.

From the guidance, it sounds like graduate over $5,250 from a higher education provider would only be tax-exempt if I was employed in a teaching or research role - if I worked in Finance and was getting my MBA, I would be unable to take any deductions then?

[Hal_Al]

Q. If I worked in Finance and was getting my MBA, I would be unable to take any deductions then?

A. Correct.  But, not exactly. Nobody can "take deductions".  The question is do you qualify for tax free tuition reduction/remission.  I interpret the wording in Pub 970 (a teaching or research role), the same as you do: you do not qualify.  More importantly, your employer also appears to have interpreted it that way and has included the income on your W-2.

[MisterAnt]

Hello Hal_Al,

Thanks for responding to our questions, I greatly appreciate it.

Have you taken a chance to look at Publication 15-B(2020) for the IRS which covers worker's fringe benefit? For reference, here is the link: https://www.irs.gov/publications/p15b#en_US_2020_publink

If you go to the section 2. Fringe Benefit Exclusion Rules -> Education Assistance -> Assistance over $5250, it talks about benefits exceeding $5250 and how one might be qualified if they fit the description of "Working Condition Benefit"

This leads to Section 2. Fringe Benefit Exlusion Rules -> Working Condition Benefits -> Education which yields the clause below quoted:

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 don't 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.

With that said, my education strictly "improves skills needed in my job". If I were to be able to prove this to my employer, would they be "required" to file my W-2 appropriately and not include the tuition reimbursement as taxable income?

[Hal_Al]

@MisterAnt 

Thanks for the info.  I'm not specifically familiar with that Pub, but it confirms my understanding of the rules.

But it doesn't change the answers above.  Your employer has to make that determination. If he includes the income on your W-2, he has determined that it does not qualify (or he has made a mistake).  Only your employer can correct that with corrected W-2.   There is no way to file your tax return to "undo" it. 

Q.   If  I was to be able to prove this to my employer, would they be "required" to file my W-2 appropriately and not include the tuition reimbursement as taxable income?  

A.  That question is probably a legal question  beyond the scope of this online forum