Graduate Tuition Benefits Tax FAQ for Employees Using the Benefit for Themselves

1. Are my graduate tuition benefits taxable?
   • The IRS considers graduate tuition assistance to be taxable compensation once your benefit exceeds $5,250 in a given calendar year. The Tuition Benefit Office withholds the taxes from your benefit payment using the maximum tax rate, which is approximately 35 to 36%. Our office is responsible for withholding* Federal, Social Security and Medicare taxes and the city wage tax.
     
     You can exclude up to $5,250 from your taxable income each calendar year. This exclusion has been renewed by Congress through the year 2012.
 
2. Are taxes based upon my program or the courses I take?
   • Taxes are based upon your program classification, not the courses in which you are enrolled. Once you are in a graduate program, you are considered a graduate student regardless of whether you enroll in graduate or undergraduate courses. Therefore, if you are in a graduate program and take an undergraduate course, you will be charged and taxed at the graduate tuition rate and taxed on the benefit received for this course.
 
3. How will the taxes be deducted?
   • Taxes on graduate tuition benefit payments will be withheld from the gross benefit* you receive from Penn, and the net benefit* will be posted to your student account as a payment. This will leave a balance on your student account equal to the amount you owe in taxes. In other words, Penn pays the taxes on your behalf by re-routing a portion of your benefit. This leaves a deficit on your student account which you cover by paying the balance on your bill to Student Financial Services.
     
     The amount of graduate tuition benefits that you receive in excess of $5,250 per calendar year will be listed as taxable income on your W-2 form. Penn will also report the taxes withheld (Federal, Social Security, Medicare and Philadelphia city wage taxes) as taxes paid on your W-2 form. Penn withholds at the maximum tax rate, so it is possible that you will get some of those withheld taxes back if you are not in the maximum tax bracket. Keep in mind, however, that the additional income can put you into a different tax bracket with unexpected results on your personal withholding and access to other tax credits.
 
4. What will my Penn tuition bill look like?
   • Your Penn tuition bill is issued by Student Financial Services and is separate from the tuition benefit management system where you manage your tuition benefit online. As long as you have requested payment of your benefit, the amount paid to your student account will be the net tuition benefit listed in the tuition benefit management system as "Benefit Amount". Once the benefit has been paid to Student Financial Services, it will be listed as "Total Amount Paid". Your bill from Student Financial Services may or may not show the tuition benefit payment depending upon their billing cycles and how early you request payment of the benefit. If your bill reflects the net benefit payment, then you should pay the balance listed. If your bill does not reflect the net benefit payment, then you can subtract the "Benefit Amount" listed in the tuition benefit management system from the total balance appearing on your bill and pay that difference. You are responsible for ensuring you are receiving the e-bills from Student Financial Services as well as paying your balance by your billing due date. You will also be responsible for any late fees that accrue if you do not pay this balance by the deadlines set by Student Financial Services.
 
5. How can I find out how much will be withheld from my benefit payment as a tax payment?
   • You will be able to view the calculation of your taxes and benefit payment in the online tuition management system approximately 24 hours after you request the benefit payment, as long as charges have already been posted to your student account by the department. The "welcome" page of the tuition management system will also display the next payment date; this is when the benefit will be paid to your account.

     If you wish to manually calculate how much will be withheld from your benefit payment in taxes, you can do so by following these steps:

     1. Add up the line-items for two course units of the Tuition, General Fee and Technology Fee, which are covered under Penn’s benefit policy. The total is your gross benefit.
     2. If this is the first time you’re using the benefit in the calendar year, you can subtract the first $5,250. The difference is the taxable amount of your benefit. If you already received $5,250 in graduate tuition benefits for the calendar year, then your entire gross benefit beyond 5,250 is taxable.
     3. Take the amount from step 2 and multiply the taxable benefit amount by 35% (the approximate tax rate for the taxable portion of your graduate tuition benefit). This new total is roughly equal to the amount that will be withheld from your benefit in taxes.
     4. Subtract this amount from your total gross benefit. This is your net benefit.
     5. Subtract your net benefit from the total balance on your bill, and this is what you will owe.
 
6. Is there any way to recover the taxes withheld?
   • You may be able to recover some of the taxes withheld if you are eligible to deduct the costs of graduate education from your gross income as a business deduction. The IRS ruling that applies to the eligibility of education expenses as a business expense can be found in chapters 12 and 13 of IRS publication #970 [pdf]. Review this publication to see whether or not you qualify. If you qualify under the above regulation, you may be able to deduct the total tuition benefit that has been added to your W-2 form as extra income and possibly the cost of books and travel to school. After you have filed your federal tax return claiming your education as an employee business expense and it has been accepted, you may send a copy of IRS Form 2106 to Penn's tax office. This is to substantiate that your education meets IRS regulations for a business expense and allow you to recover the Medicare and Social Security taxes deducted from your tuition benefits.
 
7. Will the $5,250 exemption be renewed after 2012?
   • The exemption has been extended several times since its initial creation, but our office has no information on whether it will be extended again or allowed to expire in 2012.
     
     A few times in the past, the exemption was renewed after it had expired. It was then put in place retroactively. That means it's possible that the exemption could be renewed after the start of a semester, or it could expire.
 
8. What if I decide to drop my courses to avoid the additional withholding?
   • If you decide to drop your courses, you must do so according to your academic program’s Course Selection Period that allows students to drop courses with no financial obligation. Likewise, if you wish to add a course, you must also do so by your academic program’s Course Selection Period deadline. After the Course Selection Period, you cannot add or drop courses without incurring financial penalties for which you'll be responsible.

 
9. I only take one course unit per calendar year. Will I have any out-of-pocket costs?
   • Generally, the $5,250 tax exemption allows employees one course unit per calendar year tax free. If Penn’s tuition cost for one course unit exceeds $5,250, then that portion would be considered taxable income. This means the Tuition Benefit Office will withhold approximately 35% from each dollar of the benefit, beginning with the first dollar. This creates a deficit on your student account, in roughly the same amount, which you're required to pay by the billing deadline. You're also responsible for any other fees you accrue on your student account.

*Definition of terms
Gross benefit: Penn’s benefit coverage which is 100% of the tuition fee, general fee and technology fee for a maximum of two course units per term, and two course units over the entire summer.
Net benefit: The actual payment to your student account after the withholding has been subtracted
Withholding: The amount Penn’s Tuition Benefit Office takes out of the benefit payment to pay the taxes on your behalf

Updated 3/14/2011