Hello,
I would appreciate any advice you can give on the following tuition tax issue.
I am a graduate student at a major public US research institution where I am employed as a teaching assistant for 9 months a year with a salary of about $15k. In addition to my salary I receive "tuition assistance" totaling about $3k per semester, which offsets the cost of tuition. In addition to my position as a TA I hold an outside job that brings my AGI to over $55k a year.
My university has included the "tuition assistance" payments as taxable income on my W-2. Assuming a 27% marginal rate this will result in about $1,600 in taxes. However on reviewing IRS publication
970 ("Tax Benefits for Education") and the relevant section of the US tax code (section 117) I found that a reduction in tuition for graduate student is not taxable assuming:1) It is provided by an eligible educational institution.
2) You are a graduate student who performs teaching or research activities for the educational institution.Both of these apply to my situation, so I contacted our payroll office and inquired as to why my tuition assistance didn't qualify. The payroll office pointed me to Section 117(c)(1) of the US tax code which states the provisions that would exempt the tuition assistance:
"shall not apply to that portion of any amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship or qualified tuition reduction."
the payroll office went on to point out that the university considers tuition assistance taxable income and pointed me to a university policy that states that tuition assistance shall be considered taxable income.
Next I called the IRS's help line to try to get a clear criteria for determining when tuition assistance is payment for teaching, and when it isn't. For the most part all they did was read to me the same vague sections of the publications that I had already read.
This brings me to my first question, what is the determining criteria for a tuition reduction to be consider compensation? The university appears to think that simply declaring it compensation in a university policy is sufficient. However I would think that this should be fine legal point based on the specific structure of the program. Is there any ground on which I can contest this classification?
In view of all of this, I was curious, as I'm sure you are, why the university would go out of its way to make sure the program didn't qualify for the tax free status of a "tuition reduction" program. After more poking around, I was forward a two year old memo written by a member of the accounting faculty. This document compared the impact to students in various financial situations of calling the "tuition reduction" (and thus being tax free to the students) versus calling the program compensation (which enables the student, in certain circumstances, to take take the lifetime learning credit on the tuition payment).
Since the lifetime learning credit is a _tax credit_ and tuition reduction is an exclusion the tax impact depends on your more general financial situation. Since my AGI is over $55k I do not qualify for the lifetime learning credit, and thus am stuck with a $1,600 tax bill that I wouldn't have if the program was classified as "tuition reduction". Similarly certain foreign students are ineligible for the lifetime learning credit, which disqualifies other students. Alternatively, if a student has no outside income then the tax credit seems to have about a $800 advantage. This all said one might think that the university should just give the student the option of which one to take. However, according to the memo, if the university gives an employee the option of whether to consider the payment tuition reduction, it's tax free status is immediately disqualified.
With this in mind, my questions are as follows: (1) is there a way the university could structure this program to (more) uniformly advantage everyone? (2) In light of the fact that that the university is only considering the tuition payment compensation for the tax advantages outlined above, and (as far as I know) not on based on the characteristics of the payments, does this give me any additional ground in contesting their classification as compensation?
Thank You!