Over 145,000 grad students, and quite a few undergrads, can breath a sigh of relief: the final version of the Tax Cut and Jobs Act does NOT add the value of tuition waivers to their taxable income, as would have happened under the House version of the bill. Under the House version, students could have been socked with an added $2,000 or more in income taxes, per year.
Taxability of tuition waivers was complicated even before Congress decided to take up tax reform. Whether a waiver was tax free depended on whether the student was taking undergrad or graduate courses, and whether the student was performing work for the institution. If your circumstances did not meet specific criteria (details below), your waiver was taxable. The House version of reform sought to remove those exemptions, raising taxes for graduate students who worked for their tuition waiver, and for undergrads who received a waiver because they or a parent had worked for the institution. The final version leaves these exemptions untouched.
Background -- Taxability of Tuition Waivers
Qualified Tuition Reduction
If you are allowed to study tuition free or for a reduced rate of tuition, you may not have to pay tax on this benefit. This is called a "tuition reduction." You don't have to include a qualified tuition reduction in your income.
A tuition reduction is qualified only if you receive it from, and use it at, an eligible educational institution. You don't have to use the tuition reduction at the eligible educational institution from which you received it. In other words, if you work for an eligible educational institution and the institution arranges for you to take courses at another eligible educational institution without paying any tuition, you may not have to include the value of the free courses in your income.
The rules for determining if a tuition reduction is qualified, and therefore tax free, are different if the education provided is below the graduate level or is graduate education.
You must include in your income any tuition reduction you receive that is payment for your services.
Eligible educational institution.
An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.
Can not favor the boss
Qualified tuition reductions apply to officers, owners, or highly compensated employees only 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. The group must be defined under a reasonable classification set up by the employer. The classification must not discriminate in favor of owners, officers, or highly compensated employees.
Payment for services.
Generally, you must include in income the part of any qualified tuition reduction that represents payment for teaching, research, or other services by the student required as a condition of receiving the qualified tuition reduction. This applies even if all candidates for a degree must perform the services to receive the degree. (See below for exceptions .)
You don't have to include in income the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services if you receive the amount under:
The National Health Service Corps Scholarship Program,
The Armed Forces Health Professions Scholarship and Financial Assistance Program, or
A comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college (as defined in that section).
Education Below the Graduate Level
If you receive a tuition reduction for education below the graduate level (including primary, secondary, or high school), it is a qualified tuition reduction, and therefore tax free, only if your relationship to the educational institution providing the benefit is described below.
You are an employee of the eligible educational institution.
You were an employee of the eligible educational institution, but you retired or left on disability.
You are a widow or widower of an individual who died while an employee of the eligible educational institution or who retired or left on disability.
You are the dependent child or spouse of an individual described in (1) through (3) above.
For purposes of the qualified tuition reduction, a child is a dependent child if the child is under age 25 and both parents have died. A dependent child of divorced parents is treated as the dependent of both parents.
A tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following requirements are met.
It is provided by an eligible educational institution.
You are a graduate student who is engaged in teaching or research activities for such educational institution.