Tax Implications of Regents Scholarship Program
Appendix to Policy
The University of Minnesota does not provide personal tax advice. Employees should consult with a personal tax advisor or the Internal Revenue Service for answers to specific questions.
Educational Tax Benefits:
Employees taking courses may be eligible for education-related tax benefits. Visit Educational Tax Benefits, and click on “IRS Information on Educational Tax Benefits” for resources and information regarding potentially applicable tax benefits.
The Regents Scholarship benefit is covered by two separate Internal Revenue Code sections. Section 117(d) covers undergraduate studies, and Section 127 of the Internal Revenue Code covers graduate level courses.
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.
Taxes on Graduate Level Courses – Payroll Administration
Any Regents Scholarship benefit for graduate level courses that exceeds $5,250 will result in the amount over the $5,250 exclusion limit being added to the employee’s taxable income during the semester in which they exceed 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.
The employee’s 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. 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 an employee’s gross income on the assumption that they might exceed the exclusion amount at some future date.
For IRS purposes, the taxable tuition benefit and subsequent tax withholding will be assessed on a calendar year basis. The taxable tuition benefit is added to an 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.
Pay and Taxes on the Office Human Resources website provides general information on tax withholding and links to other resources. The University of Minnesota does not provide personal tax advice. Employees should consult with a personal tax advisor or the Internal Revenue Service if they have questions about how to "even out" their tax withholding throughout the year. An employee can change their W-4 allowances at any time by going to the My Pay tab in MyU and clicking on “W-4 Tax Information.”
An employee who receives a taxable tuition benefit might qualify for education related tax benefits on their tax return. Refer to the IRS Publication 970 for more information. Employees may access beneficial education-related tax information, including Publ. 970, via the Educational Tax Benefits website, referenced above.
If the course is directly related to an employee’s job and they meet other IRS-specified criteria, an employee may be eligible for an income tax exclusion applied to the value in excess of $5,250. Refer to the Application for Exclusion of Education Benefits as Working Condition Fringe on the Tax Management Office’s Educational Tax Benefits website for more details.