Graduate Tuition Benefits Tax FAQ

Are my graduate tuition benefits taxable?
- The IRS considers graduate tuition assistance to be taxable compensation. However, based on a regulation introduced in 2002 and in place until 2010, up to $5,250 per year of graduate tuition benefits are non-taxable to you. This means the first $5,250 of graduate tuition benefits you receive per calendar year will not be taxed. Anything over $5,250 will be taxed at approximately 36.5% representing Federal, Social Security and Medicare taxes plus the city wage tax.
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.
What happens if my tuition costs are $5,250 or less?
- If the total annual cost of your graduate program courses is $5,250 or less, no taxes will be withheld on this amount.
What if my tuition costs are higher than $5,250?
- If the total annual cost of your graduate program courses is greater than $5,250, you must pay taxes on the tuition benefit payments you receive over $5,250.
How will the taxes be deducted?
- Taxes on graduate tuition benefit payments over $5,250 will be withheld from the gross tuition benefit you receive from Penn, and the net amount of the 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, and then you pay Penn back for this via your student account.
  
  The amount of graduate tuition benefits over $5,250 that you receive 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.
What will my Penn tuition bill look like?
- Your tuition bill will show your tuition benefit as a payment minus the amount withheld (i.e., taxes for benefits received over $5,250). This will leave you responsible to Penn for the balance. You will be also be responsible for any late fees that accrue if you do not pay this balance by the deadlines set by Student Financial Services.
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. Subtract $5,250 from your gross benefit (this exemption can only be taken once per calendar year). This new total is the taxable amount of your benefit.
  3. Multiply the taxable benefit amount by 36.5% (the approximate rate of tax 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.
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 11 and 12 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.

Updated 02/20/2009