Taxation of tuition waivers (graduate student)

[ebukenty]

Hi!

My spouse was a graduate student during the fall term of 2024 at the same university where I work. He studied for free as a tuition waiver. However, my university needed to increase my income and take money for educational credits from my salary. As a result, my federal, state and FICA taxable income increased, and additional withholding against gross payroll wages was generated. I lost half of my 2-week salary because of this. Can I demonstrate it to the IRS and have this money back?

Any ideas?

Thanks!

[KeshaH]

Tuition waivers for an employee's spouse is generally treated as a taxable benefit, so the additional withholding taken from your paycheck was correct. The university is required to withhold federal and state income tax as well as FICA taxes.

You can verify that the amount added to your taxable income matches the actual value of the tuition waiver to ensure that the correct amount of tax was withheld. However, if the withholding was correct based on the value of the tuition waived, you won't be able to recover that amount from the IRS as the waiver was correctly reported as taxable compensation.

[ebukenty]

Thanks for your opinion!

I understand it is a taxable benefit. But why taxes are so high? My employer gave me $4381 for my spouse's tuition. And my withholding was 2000$. It is because the employer's assistance was added to my gross income, which made my income unusually large. It turned out I paid for my spouse's tuition half cost, despite that being supposed to be free. How do I calculate if my withholding tax was right?

Thanks :))

[KeshaH]

$2,000 in additional withholding on $4,400 of additional income does seem high if that is all federal income tax withholding. Excessive withholding can sometimes happen when adding additional/imputed income because the withholding is calculated based on if you were earning that income regularly.

If that is all federal income tax withholding, when you file your tax return you can recoup some of the extra withholding as a refund (assuming you don't have other income that you owe tax on). Since the additional income was a one-time event, your tax rate on your actual tax return may not be as high as the tax rate used for your withholding.