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1 (January 14, 2005)

handle is hein.crs/crsuntaaimb0001 and id is 1 raw text is: Order Code 97-243 EPW Updated January 14, 2005 CRS Report for Congress Received through the CRS Web The Current Tax Status of Employer Education Assistance Linda Levine and Bob Lyke Domestic Social Policy Division Summary Section 127 of the Internal Revenue Code allows up to $5,250 in tuition reimbursements and other forms of employer education assistance (e.g., books, supplies, and equipment) to be exempt from income and employment taxes even if the education does not qualify as a deductible business expense. The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) reinstated the exclusion for graduate- level courses that begin after December 31, 2001. As with many other provisions in that legislation, the exclusion is extended only through December 31, 2010. Taxable Employer Education Assistance Except as discussed below, education assistance from employers generally must be included in employees' gross income for federal income tax purposes. The amount is reported on the W-2 statement that employees receive each January. Employers typically increase withholding for the additional income taxes employees owe. The assistance also is subject to Social Security and Medicare taxes, for which withholding is increased as well, and to unemployment taxes paid only by employers. Deductible Business Expense Education assistance from employers can be tax-exempt if the education meets Internal Revenue Service (IRS) tests for a deductible business expense. Essentially, these tests require that the education be job-related but not enable one to meet minimum requirements for current work or prepare for a new career. The tests consist of four questions displayed on the flow chart below.' Employer tuition reimbursements can be excluded from employees' gross income if the education meets the IRS tests and they are provided through an accountable plan (i.e., employees are required to substantiate reimbursements to their employer and return any excess payments). If an accountable plan does not exist, the assistance is included in employees' gross income; however, Congressional Research Service +** The Library of Congress 1 IRS regulations 1.162-5. For additional information, see Your Federal Income Tax (IRS publication 17) and Tax Benefitsfor Education (publication 970).

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