Calculating Withholding With Graduate Tuition Benefit

[chrisoakely]

In January this year, I began a graduate degree program at the same college where I work. The college offers a benefit of 90% tuition discount. Our costs are high, so the value of the benefit equates to ~$27k for the year.

I am afraid that this benefit is taxable and I'd like to know how much additional withholding I should be requesting to ensure that we are stuck with a big tax bill next year. 

[marctu]

Thank you for the question.   So this is our starting point: Qualified Tuition Reduction 

This IRS resource starts here:

Free or reduced tuition provided by eligible educational institutions to its employees may be excludable from gross income as a qualified tuition reduction. Whether a tuition reduction is a “qualified” tuition reduction and excludable from income depends on whether it is for education below or at the graduate level and whether the tuition reduction represents payment for services. (Emphasis Added)

Based upon your fact pattern you are a current employee, but you are working on a graduate degree.  

Section 117 (d) of the Internal Revenue Code allows employees of certain educational institutions, including nonprofit universities and colleges, to exclude from taxable income qualified undergraduate tuition reductions they, or their dependents, receive from their employer.

A tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following requirements are met.

• It is provided by an eligible educational institution.

• You are a graduate student who performs teaching or research activities for the educational institution.

If you do not meet the test above then you should adjust for the income that most likely will be paid on a 1099-MISC.   You would add this income in Part 4 (a). 

[chines2]

Great question.  The threshold question here is really whether or not you are providing teaching or research activity-related services to the institution, since you are in a graduate-level program.  If you are, you may qualify for Qualified Tuition Reduction.  You can find more information about this benefit here.

Hope this helps!