Tax Implications of Regents Scholarship Program
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Education Tax Benefits:
Employees taking courses may be eligible for education related tax benefits. Visit Education Tax Benefits for general information and information regarding the Hope Scholarship Tax Credit and Lifetime Learning Tax Credit.
Section 117(d) of the Internal Revenue Code - Undergraduate Courses
Section 117(d) of the Internal Revenue Code governs the taxability of undergraduate tuition benefits offered to employees of a college or university. Under this section a qualified tuition reduction offered by a college or university to its employees for undergraduate coursework is excluded from taxable income. As a result, as long as section 117(d) is in its current form, recipients of the Regents Scholarship at the University will not be taxed on the value of the qualified tuition reduction.
Section 127 of the Internal Revenue Code - Graduate Level Courses
Section 127 of the Internal Revenue Code relating to Educational Assistance Programs provides an exclusion of employer-paid tuition benefits from taxable income for employees enrolled in graduate level classes, up to a maximum annual amount of $5,250. However, the amount that exceeds $5,250 in a calendar year will be added to income as a taxable fringe benefit and the appropriate taxes will be withheld from regular pay.
Frequently Asked Questions Regarding Taxes:
- Why are some employees taxed on their Regents Scholarship?
If employees are taking graduate level courses under the Regents Scholarship Program, the value of the tuition benefit for the calendar year that exceeds $5,250 is taxable income to them.
The Regents Scholarship benefit is covered by two separate Internal Revenue codes. Section 117(d) covers undergraduate studies, and Section 127 of the Internal Revenue Code covers graduate level courses. Section 127 excludes up to a maximum amount of $5,250 from taxable income for employees enrolled in graduate level classes. Any benefit amounts exceeding that limit are currently considered taxable and added to their income.
- Are taxes taken out of the employee's pay check and when?
If an employee's Regents Scholarship benefit for the calendar year exceeds $5,250, the amount over the $5,250 exclusion limit is added to their taxable gross during the semester in which they exceeded the limit. Generally, the total value of the taxable amount will be prorated over the remaining pay periods in the term, usually six pay periods, and added to the taxable gross as a taxable fringe benefit.
Your total tuition amount is monitored each period and appropriate adjustments are made to the employee's taxable gross benefit if their tuition benefits total changes due to added or dropped classes.
- Are the taxes withheld on an academic or calendar year basis?
For IRS purposes, the taxable tuition benefit and subsequent tax withholding will be assessed on a calendar year basis.
- How are the taxes withheld from the benefit and how much of a tax reduction can be expected?
The taxable tuition benefit is added to the employee's taxable gross, and the taxes are calculated and withheld from their pay. The federal and state income taxes are calculated based on their W-4 withholding allowances. Social Security and Medicare taxes are calculated as a percentage of the taxable gross (4.2% and 1.45% respectively).
The estimated amount of additional tax the employee will have withheld can be determined by using the Paycheck Calculator on Employee Self-Service. If the employee needs to change their W-4 allowances they are directed to do so by going to "Update Your W-4 Tax Information" on Employee Self-Service.
- If employees know at the beginning of the year that their Regent's Scholarship tuition benefit will exceed the $5,250 exclusion limit in Fall term, can they start having smaller taxable benefit amounts added to their taxable gross throughout the year so their tax deductions aren't so high in the fall?
The Regents Scholarship benefit does not become taxable until it actually exceeds the exclusion limit, so it is not possible to add a taxable benefit to employees' gross income on the assumption that they might exceed the exclusion amount at some future date.
The University of Minnesota does not provide personal tax advice. Employees should consult with a personal tax advisor or the Internal Revenue Service if you have questions about how to "even out" their tax withholding throughout the year.
The Employee Self-Service Web site, under Pay & Taxes, provides general information on tax withholding and links to the IRS Personal Withholding Allowances Calculator. You can change your W-4 allowances can be changed at any time, to increase or decrease your income tax withholding as you see fit, on Employee Self-Service under "Update Your W-4 Tax Information."
- Do employees have to do anything special to accommodate this additional income on their tax return when they file?
If employees have a taxable tuition benefit, they might qualify for the Lifetime Learning Tax credit or the above-the-line tax deduction on their tax return. Refer to the IRS Publication 970 for more information. The University has a Web site with links to beneficial information, including Publ. 970, in determining whether an employee qualifies for an education tax credit. The Education Tax Benefits Web site can be accessed through the Student One Stop Home page under Finances, or the Employee Self-Service Web site under Pay & Taxes.