TAXATION OF THE BYU TUITION BENEFIT FOR SPOUSES TAKING GRADUATE CLASSES

Rules on Taxation

Under provisions in Section 117 of the Internal Revenue Code (IRC), BYU employees, along with eligible spouses and dependents can use the BYU Tuition Benefits for undergraduate BYU classes without having to pay taxes on the value of the tuition. In most cases, under the terms of IRC Section 132, employees can also take graduate classes at BYU without having the benefit taxed to the extent the classes relate to their current job. However, the only way for spouses to exclude the value of graduate tuition benefits from taxable wages of the employee is for those spouses to be employed as teachers or researchers for the University.
BYU is required by the IRS to withhold appropriate taxes on taxable benefits. Even though the taxable benefit is for the spouse’s tuition, the related withholding tax is withheld from the employee’s salary because the benefit is available through the employee’s benefits plan.

The Taxation Process

Before the tuition benefit can be paid for each semester that an eligible employee’s spouse takes graduate classes, the employee is required to complete a Tuition Taxation Form For Spouses Taking Graduate Classes and turn it into the Benefits Office in D-240 ASB. That form outlines the options offered under the IRC. Any questions may be directed to the Benefits Office at 422-4716. The Tuition Taxation Form For Spouses Taking Graduate Classes offers four options regarding the taxation process.

Option 1: Teacher or Researcher for the University

This option allows the employee to request that the spouse tuition benefit not be taxed because the spouse is employed as a teacher or researcher for the University. Verification will be required on the Human Resource/Payroll system.

Option 2: Anticipated Application of a Tax-Return Benefit

There are two instances where the Federal and State income taxes for a spouse’s graduate tuition need not be withheld. However, the benefit must be included on the employee’s W-2 as taxable wages. FICA tax must be charged to the employee. Please consult your tax advisor to determine whether you are eligible. The two instances are as follows:

1. Above-the-Line Tax Deduction for Higher Education Expenses
Section 222 of the IRC permits an annual deduction of $4,000 that can be applied to the spouse graduate tuition benefit. If this option is chosen for the tax year, the spouse’s graduate tuition benefit will be included in the employee’s W-2 as taxable wages. The appropriate FICA tax will be withheld from the employee’s payroll check(s). The employee may spread the amount of tuition benefit subject to FICA tax over two or three payrolls. He or she must designate the payroll dates and amounts. At the end of the year, the employee will claim the $4,000 deduction when filing his or her income tax return. This deduction is currently only available for the years 2007. There are income limitations for this benefit. Please consult your tax advisor.

2. Life-time Learning Credit
The Life-time Learning Credit is a Federal tax credit that is allowed in certain instances. The family may receive a Federal tax credit amount equal to 20 percent of the family’s first $10,000 of out-of-pocket qualified tuition and related expenses. If this option is chosen for the tax year, the spouse’s graduate tuition benefit will be included in the employee’s W-2 as taxable wages. The appropriate FICA tax will be withheld from the employee’s payroll check(s). The employee may spread the amount of tuition benefit subject to FICA tax over two or three payrolls. He or she must designate the payroll dates and amounts. At the end of the year, the employee will claim the Federal tax credit when filing his or her income tax return. There are income limitations for this benefit. Please consult your tax advisor.

Option 3: Withholding of the Taxes

This option will be applied if options 1,2 and 4 do not apply. Appropriate Federal, State and FICA taxes will be withheld from the employee’s future paychecks as indicated. The benefit will be included in the W-2 taxable wages of the employee. The employee may spread the amount of tuition to be taxed over two or three payrolls. He or she must designate the payroll dates and amounts. Please consult your tax advisor.

Option 4: Retirees

Retirees who have no income through the BYU Payroll system will be issued a Form 1099 unless the Teaching or Research provision (Option 1) applies to their spouse. The value of the tuition will be added to the retiree’s form 1099 for the tax year. At the end of the year, the retiree may choose to use the Above-the-Line Tax Deduction or the Life-time Learning Credit when filing his or her income tax return to the extent they apply. There are income limitations for this benefit. Please consult your tax advisor.