Employees may exclude work-related education expenses from income reported on their federal income tax returns, if these expenses represent a working condition fringe benefit. This is above and beyond the annual exclusion for employer tuition assistance.
Working Condition Fringe Benefits
Amounts above the $5,250 annual exclusion for employer-provided educational assistance may also be tax-free, if they represent a working condition fringe benefit. A working condition fringe benefit is an expense that would be deductible as an employee business expense if paid for by the employee. To qualify, an expense must be an ordinary and necessary business expense and must be properly substantiated with receipts and other documentation.
The education must be job-related. Each course must individually qualify as a working condition fringe benefit to qualify for the exclusion from income. To qualify as a working condition fringe benefit, the education must satisfy at least one of the following two requirements:
- The education maintains or improves job-related skills needed in the employee’s present job. This includes refresher courses and courses dealing with current developments.
- The education is required by the employer, by law or regulation, or professional standards for the employee to keep his or her present salary, status or job and the education must serve a genuine business purpose of the employer.
The education does not qualify as a working condition fringe benefit if:
- The education is required to meet the minimum educational requirements for qualification in the employee’s present employment, trade or business.
- The education is part of a program of study that will qualify the employee for a new trade or business.
Once an employee has met the minimum educational requirements in effect on the date the employee is hired, the employee is considered as continuing to satisfy those requirements even if they subsequently change. This means that additional education to satisfy the new requirements will qualify as a working condition fringe benefit.
Education relating to a change of duties is not considered as qualifying the employee for a new trade or business if the new duties involve the same type of work as the employee’s present job. For example, if an employee is qualified as a teacher in one state, any education required to satisfy the requirements of another state will qualify as a working condition fringe benefit.
The education can qualify as a working condition fringe benefit even if the employee takes a temporary leave of absence to pursue the education. A leave of absence is considered temporary if it is a year or less in total duration.
Travel as a form of education (such as combined vacation/education programs) is generally not considered a working condition fringe benefit even if approved by the employee’s employer except if the major portion of the activities during the travel are directly related to the employee’s duties and the activities directly maintain or improve the skills required for the individual’s employment. This is in contrast with travel from work to/from school and travel from home to/from school. The purpose of the trip must be primarily to obtain qualifying education. Personal expenses do not qualify.
Eligible expenses include tuition, fees, textbooks, supplies and equipment.
The expenses are deducted on Schedule A of IRS Form 1040 as miscellaneous itemized deductions and are subject to the 2% of the adjusted gross income (AGI) threshold. The expenses must also be reported on IRS Form 2106 or 2106-EZ.
Self-employed taxpayers can include the expenses on Schedule C, Schedule C-EZ or Schedule F of IRS Form 1040, as appropriate.
Taxpayers cannot double dip. Amounts excluded from income as a working condition fringe benefit are not eligible for any other deduction or tax credit. Thus, each dollar of qualified higher education expense can be used to justify only one tax benefit.
The American Opportunity Tax Credit (AOTC) has a greater financial value than other education tax benefits. The main exception is when an exclusion from income reduces the employee’s adjusted gross income enough to trigger other tax benefits. Accordingly, it may be financially beneficial for families to prioritize the AOTC ahead of other education tax benefits if the family qualifies.
The requirements for employer educational assistance must be specified in a written plan of the employer. This plan must not discriminate in favor of highly compensated employees. No more than 5 percent of the amounts paid or incurred by the employer may be provided to employees who are shareholders or owners who own more than 5 percent of the stock of the employer.
Students do not need to be degree-seeking to qualify for the exclusion from income, nor do they need to be enrolled on a half-time or full-time basis. The courses do not need to be provided by a college or university that is eligible for Title IV federal student aid. Students who have been convicted of a felony drug offense are eligible for this education tax benefit.
Only courses taken by the employee are eligible, not courses taken by the employee’s spouse or dependents.
There is no phaseout on eligibility for employer educational assistance.
The legislation authorizing the exclusion from income for working condition fringe benefits does not expire.
- Tax Benefits for Work-Related Education, Chapter 27, IRS Publication 17
- Business Deduction for Work-Related Education, Chapter 12, IRS Publication 970
- IRS Form 1040, Schedule A
- IRS Form 2106, Employee Business Expenses
- IRS Form 2106-EZ, Unreimbursed Employee Business Expenses
- Deficit Reduction Act of 1984, (P.L. 98-369, 7/18/1984), added exclusions from income for certain fringe benefits, including working condition fringe benefits, effective with the 1985 tax year
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