A qualified tuition reduction is tax free. It is a reduction in
tuition that meets the following rules. Separate rules apply to
education below the graduate level and education at the graduate
level.
Education below the graduate level.
A tuition reduction for education below the graduate level is tax
free if the reduction is provided by an educational institution to its
employees for their education or the education of any person treated
as an employee. It must not represent a payment for services. Under
this rule, only the following are treated as employees.
- 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, or
- A dependent child or spouse of any person listed in (1)
through (4), above.
Child of deceased or divorced parents.
If both parents have died, and if one of the parents qualified as
an employee under (1) through (4) above, their child, if under age 25,
can qualify to exclude a tuition reduction from income.
A dependent child of divorced parents is treated as the dependent
of both parents.
Officers, owners, and highly compensated employees.
Qualified tuition reductions apply to officers, owners, or highly
compensated employees 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, defined under a reasonable
classification set up by the employer. It must not discriminate in
favor of owners, officers, or highly compensated employees.
Graduate education.
A tuition reduction for graduate education is tax free if the
reduction is provided by an educational institution to a graduate
student who performs teaching or research activities for that
institution. The qualified tuition reduction must be for education
furnished by that institution, and not represent payment for services.
The term an educational institution is defined earlier
under Tax-Free Scholarships and Fellowships.
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