Tax status of graduate education

[Guest smarkman]

My spouse was reimbursed for taking classes to earn an MBA. His employer has told him consistently that it is job-related and he does not owe taxes on the reimbursements he received. Yet everything I read seems to indicate that graduate education is not included in the tax exclusion (only job-related undergraduate education is excluded). Who is correct?

[Scott]

If the employer has an educational assistance program under section 127 of the tax code, reimbursement of certain educational expenses are excludable from an employee's income. However, reimbursement of expenses for graduate courses are not excludable under section 127. Graduate courses are those taken by an employee who has a bachelor's degree or is receiving credit toward a more advanced degree, if the particular course can be taken for credit by any individual in a program leading to a law, business, medical, or other advanced academic or professional degree.

First, you should determine if the courses meet the definition of "graduate courses" above. If not, and if the employer has a section 127 plan, the reimbursements should be excludable from income.

If the reimbursements are not excludable from income under section 127, you still may be able to exclude them as a fringe benefit. Generally, reimbursements for education expenses will be excludable if the education is required in order for the employee to keep his job. Reimbursements for education expenses relating to education necessary to meet the minimum requirements of a position (even if the employee is already working in that position) are not excludable.

Hope this helps.

[Guest CLKeown]

smarkman -

From the information you presented (assuming that there are no other significant determining factors) I think that you are correct and that the reimbursements are taxable.

In order for a educational expense to be deductible (even if the education could lead to a degree) it must meet one of these tests:

1 - It must be required by your employer or the law to keep your present salary, status or job. The required education must serve a bona fide business purpose of your employer.

2 - It must maintain or improve skills needed in your present work.

Reimbursements for nondeductible expenses are taxable.

To be an Employer-Provided Education Assistance Program - the Plan must be in writing and must meet certain requirements (your husband's employer can tell you if theirs is an Educational Assistance Program).

Under an Educational Assistance Program tax-free benefits include tuition, fees and similar expenses, books, supplies and equipment. The payments must be for undergraduate-level courses that begin before June 1, 2000. And the payments do not have to be for work-related courses. Reimbursements over $5,250 are generally taxable.

You should obtain a copy of IRS Publication 508 "Tax Benefits for Work-Related Educational Expenses" and read it carefully.

Carole