Employer Scholarship... Taxable?

[CCL]

I've searched everywhere I can think of, but can't find the answer. Since I know you all are the smartest bunch around, I'm turning to you for help.

My son (still our dependent) received tuition reimbursement or what they call a "scholarship" from Dad's employer. We did use this to pay a portion of his college tuition.

I know, in most cases, scholarships are not taxable, however the employer did withhold taxes from the scholarship amount and appears to have included it in Dad's wages for the year. Does this sound correct?

We know other employees who received tuition reimbursements for themselves and they were not taxed on the money. So I'm wondering if there is a difference in tax treatment depending on whether it is for the employee vs. dependent?

Next question - If the "scholarship" is taxable as income for Dad, would it then be possible to deduct the tuition we paid?

Like I said, I've looked everywhere I can think of, including the IRS web site, but can't find anything pertaining to scholarships from employers to employee dependents. Thanks so much for your help and any links/info/experience anyone can share.

[taxref]

For the purposes of accuracy, allow me to give a slightly roundabout answer.

For purposes of the tuition deduction or the education credits, you must first compute your qualified educational expenses. That is done by first adding all qualifying educational expenses, then by deducting the amount of scholarships or grants (but not loans) the student received.

If the tuition reimbursement was included in your husband's federal taxable wages (ie: in block 1 of your husband's W-2), those funds would not be a scholarship or grant. While it is unusual to give an employee a tuition reimbursement for a child, it would be treated as a salary bonus to your husband. That would be why it was taxable.

Consequently, based on the facts in your message, you would not have to reduce qualified educational expenses by the amount of the reimbursement. If it was not included in Block 1 of his W-2, the reverse would be true.

[CCL]

Taxref, thanks for your help and quick response. That's pretty much the conclusion I was coming up with. If you (or anyone else) has a link pertaining to this, I would definitely like to check it out.

[mwcpa]

if you look at IRS pub 15-B, educational institituions can provided a "tax free" benefit as follows:

"An educational organization can exclude the value of a qualified tuition reduction it provides to an employee from the employee's wages.
A tuition reduction for undergraduate education generally qualifies for this exclusion if it is for the education of one of the following individuals.
A current employee.
A former employee who retired or left on disability.
A widow or widower of an individual who died while an employee.
A widow or widower of a former employee who retired or left on disability.
A dependent child or spouse of any individual listed in (1) through (4) above.
A tuition reduction for graduate education qualifies for this exclusion only if it is for the education of a graduate student who performs teaching or research activities for the educational organization. "

From IRS publication 970
"Officers, owners, and highly compensated employees. Qualified tuition reductions apply to officers, owners, or highly compensated employees only if benefits are available to employees on a nondiscriminatory basis. This means that the tuition reduction benefits must be available on substantially the same basis to each member of a group of employees. The group must be defined under a reasonable classification set up by the employer. The classification must not discriminate in favor of owners, officers, or highly compensated employees. "

In addition from 970
"Benefits over $5,250. If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income. "

Hope this helps

[CCL]

Thanks mwcpa for your help with this. After doing a bit more research, I think I've figured it out. It seems my husband is being taxed on the reimbursement due to being a "highly compensated employee," so it's considered a taxable fringe benefit (I think that's the term that was used).

As taxref stated, "you would not have to reduce qualified educational expenses by the amount of the reimbursement." This actually works out better for me anyway. ;D

Hopefully I've got it all straight.