Why has this happened?
The decision to end the tax exemption for graduate tuition (and soon, undergraduate tuition) for courses not directly related to job performance was based on the desire to balance the federal budget by raising revenues and cutting expenditures. Essentially the act of the Republican-led Congress first elected in 1992, the Congressional Quarterly estimated the costs of these exemptions in lost tax revenues to be $867 million through Jan. 1, 1997. See Section 127 Legislative History, below.
My supervisor won't sign the form saying my course is job-related, but I believe it is. What should I do?
IRS rules require a supervisor's signature to certify a course is job-related and thus, tax exempt. If a Johns Hopkins employee feels strongly a course is job-related and his or her supervisor refuses to sign the certification saying it is, the employee should contact the local Human Resources officer for possible mediation.
What if the particular course I'm taking isn't job-related but it is part of a degree program that is?
Job-related exemptions are made on a course-by-course basis. If the course is not job related it is not considered exempt.
The university's memo of September 17 indicated that all of the taxes would be taken out in the November 15 to December 31 pay period. This poses a real hardship for me and my family.
In the future, the university will try to spread the additional tax out over the course of the semester during which the class is taught. In this case, owing to the short notification period, the university will extend deductions out from six to ten payments where there is demonstrated need. Contact the university Tax Office (410) 516-8155 at once.
The university is taking out taxes at a rate (28% Federal) that is considerably above my tax rate. I know I'll get the overpayment back when I file my tax return, but that doesn't help me pay the rent right now.
The Tax Office based the deductions on the probable rates for the greatest number of people. Although some individuals may fall into a lower tax bracket, the difference in tax collected will probably not be all that great, especially when spread out over four or more payments. However, university employees may contact the Tax Office at (410) 516-8155 to discuss this issue further.
How will this tax be handled next semester?
The university is doing everything in its power to avoid unpleasant surprises like this from occurring again. The tuition remission form is being redesigned to make students aware of their tax liability at the time they register. Every effort will be made to spread future tax payments out over the course of the entire semester. The situation is fluid and may continue to change, and there may even be a further effort to reintroduce legislation reinstating the exemptions on a permanent basis. This site and The Gazette will continue to keep people informed as the issue develops.
What is the outlook for changing the Internal Revenue Code next year so that, once again, my graduate tuition remission, up to $5,250 a year, will not be taxed?
Most Congressional observers agree that there will at least be an effort to reintroduce exemptions for graduate and undergraduate (due to expire May 31, 1997) tuition remission in the coming year. How those bills will fare is anyone's guess.
If the tuition remission is no longer tax exempt, will the university then abandon the $5,250 reimbursement ceiling imposed by the tax code?
Issues of tuition remission are due to be reviewed in the coming year on a university-wide basis and some changes may occur. As yet, no decisions have been made in this regard.
[The following summary is based upon information provided
by the National Association of Independent Colleges and
Section 127 was established to reduce administrative inequities, tax code complexity, and disincentives to upward mobility.
In academic year 1992-93, approximately 431,500 students received section 127 benefits.
Nearly 95 percent of the students who received section 127 benefits were pursuing a degree or certificate. The types of degrees sought were: associate, 33 percent; bachelor's, 23 percent; certificate, 13 percent; master's, 22 percent; other, 4 percent. (The total exceeds 100 percent due to rounding.)
The average amount received was $688 for those who attended community colleges, $1,155 for those at four-year public colleges, and $2,280 for those at independent colleges.
About 35 percent of section 127 recipients were enrolled in business and business-related fields, such as accounting, finance, marketing, and business administration. Other majors specified by section 127 recipients included health care (12.8 percent); engineering (9.9 percent); humanities (9.1 percent); and technical fields (8.6 percent).
The average age of section 127 recipients was 36. Fifty- four percent of all recipients were female.
Sixty-two percent of recipients received amounts of less than $1,000. Nearly 24 percent received between $1,000 and $2,500, and about 14 percent received more than $2,500.
Section 127 recipients were concentrated in four types of job classifications: professional (teachers, nurses, engineers, etc.) made up 26 percent of all recipients; managers/administrators, 20.6 percent; clerical/secretarial, 20.2 percent; and technical, 8.5 percent. Those in other occupational classifications--such as services, retail trade, and laborers--collectively accounted for about 23 percent of the recipients.
The average annual employment earnings of section 127 recipients in academic year 1992-93 was $32,859. This is comparable to the average amount earned by all full-time, year-round employees, which was $30,946 in 1992, as reported by the U.S. Bureau of the Census.
Prior to 1978, only specifically "job-related" educational
assistance could be
excluded from gross taxable income, under sections 61, 117, and
162 of the
Internal Revenue Code. Section 127 of the Revenue Act of 1978
established employer-sponsored educational assistance as
excludable for any
type of course, apart from those related to a hobby or sport.
supplies, and books were covered under the new law, while
meals were not.
In making this change, Congress addressed three broad policy goals:
1. Reduce administrative inequities arising from uncertainties--often reflected in conflicting court decisions--over what constituted "job-related" education. Entry-level employees, for example, rarely had job descriptions broad enough to claim an exemption for legitimate educational assistance.
2. Reduce the complexity of the tax code. As the congressional Joint Committee on Taxation wrote, "the previous 'job-related' distinction often seems both ambiguous and restrictive...Not only must the IRS use valuable personnel time in making [case by case] determinations of taxability, but employees and employers also must justify their positions."
3. Remove disincentives to upward mobility. "The tax law has required out-of-pocket tax payments for employer-provided educational assistance from those least able to pay, even though they receive only services, not an increased paycheck." The new law was expected to promote self-improvement and job advancement among lower-paid and less-skilled workers. It also provided incentives to employers, who benefit from reduced administrative costs and are more likely to provide educational assistance as a benefit when it compares favorably with taxable wage increases.
Section 127 was originally established as a five-year provision, to give officials time to study it. When it expired at the end of 1983, a series of reauthorization provisions were passed.
1978 Congress passes the Revenue Act of 1978 (Public Law
creating section 127 of the Internal Revenue Code. The
provision is effective for five years, beginning on
1984 Public Law 98-611 retroactively extends section 127 from January 1, 1984, to December 31, 1985. The extension set a $5,000 annual limit on the amount that can be deducted from income taxes, and establishes an annual reporting requirement under section 6039D of the Internal Revenue Code.
1986 Public 99-514 retroactively extends section 127 from January 1, 1986, to December 31, 1987. The annual exclusion limit is raised to $5,250; employers are required to report the number of highly compensated employees participating in the plan.
1988 Public Law 100-647 retroactively extends section 127 from January 1, 1988, to December 31, 1988. The extension disqualifies formerly eligible graduate courses.
1989 Public Law 101-239 contains a retroactive nineteen-month extension of section 127, from January 1, 1989, to September 30, 1990.
1990 Public Law 101-508 retroactively extends section 127 from October 1, 1990, to December 31, 1991. The extension reinstates the eligibility of graduate-level courses, effective for taxable years beginning after December 31, 1990.
1991 Public Law 102-227 contains a retroactive six-month extension of section 127, from January 1, 1992, to December 31, 1994.
1993 Public Law 103-66 contains a retroactive eighteen-month extension of section 127, from July 1, 1992, to December 31, 1994.
1995 H.R. 127 introduced on January 3, 1995, by Representatives Sander M. Levin (D-Mich.) and E. Clay Shaw, Jr. (R-Fla). S.1095 introduced on August 1, 1995, by Senators Daniel Patrick Moynihan (D-NY) and William V. Roth, Jr. (R-Del.). Both bills would make section 127 a permanent part of the tax code. The bills do not pass.
1996 On August 20, President Clinton signs into law an extension of Section 127 of the Internal Revenue Code concerning the taxability of tuition benefits provided to University Employees. Under the extension, tuition remission up to $5,250 annually is non-taxable. However, this exclusion expires on June 30, 1996 for courses at the graduate-level. In addition, the extension will expire on May 31, 1997 for undergraduate courses.
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