My employer is including my graduate school tuition reimbursements on my W-2. Where do I claim these education expenses on my Form 1040?

If your graduate school tuition is deductible and the reimbursements are included in your income as wages, you may take the expense as a miscellaneous itemized deduction on Form 1040, Schedule A (PDF), Itemized Deductions, line 20. You may also need to attach Form 2106 (PDF), Employee Business Expenses. For more information, refer to Publication 508, Tax Benefits for Work-Related Education; Tax Topic 513, Educational Expenses; and Form 2106 (PDF), Employee Business Expense.

References:

• Publication 508, Tax Benefits for Work-Related Education
• Tax Topic 513, Educational Expenses

Is tuition reimbursement for school a form of taxable income or not?

If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2. You do not have to include the benefits on your income tax return. The exclusion also applies to educational assistance for graduate level courses.

To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work.

Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments do not have to be for work-related courses. Educational assistance benefits do not include payments for the following items:

(1) Meals, lodging, transportation, or tools or supplies (other than textbooks) that you can keep after completing the course of instruction.

(2) Education involving sports, games, or hobbies unless the education has a reasonable relationship to the business of your employer, or is required as part of a degree program.

References:

For further information, please see, Publication 508, Tax Benefits for Work Related Education .

Tax Topic 513 Tax Topic 513, Education Expenses

References:

• Publication 520, Scholarships and Fellowships
• Tax Topic 513, Educational Expenses
• Publication 508, Tax Benefits for Work-related Education

My employer is including amounts paid graduate school related expenses on my Form W-2. Where do I claim education expenses on my Form 1040?

The law changed in 2002 to allow up to $5,250 in graduate school related expenses paid by educational assistance program to be excluded from gross income. If your employer has included amounts paid for graduate school related expenses amounting to $5,250 or less with your wages, tips, and other compensation shown in box 1 of your W-2, ask your employer for a corrected W-2. If you have received amounts for graduate school related expenses that are includable in gross income, you may deduct expenses attributable to those amounts on Form 1040, Schedule A (PDF), Itemized Deductions.

References:

• Publication 508, Tax Benefits for Work-Related Education
• Tax Topic 513, Educational expenses

Is my employer supposed to include mileage reimbursement as a part of my gross income on my Form W-2, and do I include it on my return as wages, tips & salaries?

That depends on whether you were reimbursed under an accountable plan or under a nonaccountable plan. Generally, an employer will have an accountable plan if it pays business expenses that would otherwise be deductible by the employee, requires the employee to substantiate the expense, and does not permit the employee to keep any reimbursements that exceed expenses. If the employer does not use an accountable plan, mileage reimbursement would be included in your wages on Form W-2. For more information on reimbursements and accountable plans, refer to Chapter 6 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

If your mileage reimbursement is included in box 1 on Form W-2, you need to enter that amount on the "wages, salaries, and tips" line of your tax return. If you itemize your deductions on Form 1040, Schedule A (PDF), Itemized Deductions, you may deduct the business transportation expense as an employee business expense, subject to the 2% limitation of adjusted gross income. You may usually deduct either your actual business automobile expenses or use the standard mileage rate. For more information on when you may use the standard mileage rate, refer to Chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

References:

• Publication 463, Travel, Entertainment, Gift, and Car Expenses
• Publication 529, Miscellaneous Deductions
• Tax Topic 501, Should I itemize?
• Tax Topic 510, Business use of car
• Tax Topic 514, Employee business expenses

If my employer reimbursed my education expenses and included the reimbursement in my taxable income, is the amount still eligible for the Lifetime Learning Credit?

The amount included as taxable income is eligible for the Lifetime Learning Credit. If your tuition is paid by your employer but is not included in your taxable income, then the amount of the tuition is ineligible for the education credit. This is because double tax benefits are not allowed.

References:

• Publication 508, Tax Benefits for Work-Related Education
• Tax Topic 513, Educational expenses

If we give an employee a monthly car allowance, must it be included in the employee's taxable wages on their Form W-2?

Generally yes, unless paid under an accountable plan.

To be an accountable plan, your reimbursement or expense allowance arrangement must meet the qualifying requirements, explained later. A reimbursement or expense allowance arrangement is a system by which you substantiate and pay the advances, reimbursements, and charges for your employees' business expenses. If you make a single payment to your employees and it includes both wages and an expense reimbursement, you must specify the amount of the reimbursement.

Qualifying requirements. To qualify as an accountable plan, your reimbursement or expense allowance arrangement must require your employees to meet all of the following rules:

They must have paid or incurred deductible expenses while performing services as your employees,

They must adequately account to you for these expenses within a reasonable period of time, and

They must return any excess reimbursement or allowance within a reasonable period of time.

Please refer to Publication 535, Business Expenses, for additional information about accountable and nonaccountable plans.

References:

• Publication 535, Business Expenses
• Publication 463 , Travel, Entertainment, Gift and Car Expense

If our business pays for an employee's airfare on a business trip, but the employee does not submit an expense form relating to the travel, do we need to issue a Form 1099-MISC?

No, you should report the amounts as wages on Form W-2. Generally, Form 1099-MISC is not issued to employees. Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and subject to income tax withholding and payment of social security, Medicare, and FUTA taxes. Your payments are treated as paid under a nonaccountable plan if:

Your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation, or

You advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount he or she does not use for business expenses.

The amount of the airfare should be included on the employee's Form W-2.

References:

• Publication 15, Circular E, Employer's Tax Guide
• Publication 15-A (PDF) , Employer's Supplemental Tax Guide

How should a tuition reimbursement program for employees be reported as income to an employee? Should the employee be taxed at the 27%, 25% rate for payments made after May 28, 2003, rate for supplemental payments on the next pay check after successful completion of the course or is this something that we just include on the W-2?

If the tuition reimbursements do not qualify as a tax free fringe benefit under the rules for Educational Assistance Programs or as a Working Condition Fringe Benefit, the tuition reimbursement is wages for Federal Income Tax, Social Security, and Medicare Tax purposes.

For employment tax and withholding purposes, you can treat fringe benefits as paid on a pay period, a quarter, a semiannual, annual, or other basis as long as the benefits are treated as paid no less frequently than annually. You do not have to choose the same period for all employees.

You can change the period as often as you like as long as you treat all the benefits provided in a calendar year as paid no later than December 31. You can also treat the value of a single fringe benefit as paid on one or more dates in the same calendar year, even if the employee receives the entire benefit at one time.

You can add the value of fringe benefits to regular wages for a payroll period and figure income tax withholding on the total, or you can withhold Federal income tax on the value of fringe benefits at the flat 27% (25% rate for payments made after May 28, 2003) applicable to supplemental wages. You must withhold the applicable income, social security, and Medicare taxes on the date or dates you chose to treat the benefits as paid. Deposit the amounts withheld as discussed in section 11 of Publication 15, Circular E, Employer's Tax Guide .

References:

• Publication 15, Circular E, Employer's Tax Guide
• Publication 15-A (PDF) , Employer's Supplemental Tax Guide
• Publication 15-T (PDF) , New Withholding Tables (For wages paid through December 2004)