Tax treatment of repaid tuition after employment termination

Question

I am getting audited....yay!

So here is the situation

In 2010 I worked for mega corp that paid my tuition for a qualified master degree program.

Obviously I am not entitled to an education tax benefit, but wait there is more.

In December of that year I left the company for other opportunities and paid mega corp back the tuition money in January of the following year.

What is the proper tax treatment of this scenario? I claimed it on my 2010 year taxes even though I paid it off in 2011. I based this decision on the IRS's wording about education loans. IE you are entitled to the tax benefit when the tuition bill is paid not when the loan is repaid.

Thanks in advance for your help.

Answer 1

I suggest you have a professional assist you with this audit, if the issue comes into questioning. It might be that it wouldn't. There are several different options to deal with such situation, and each can be attacked by the IRS. You'll need to figure out the following:

1. Have you paid taxes on the reimbursement? Most likely you haven't, but if you had - it simplifies the issue for you.

2. Is the program qualified under the employers' plan, and the only reason you're not qualified for reimbursement is that you decided to quit your job? If so, you might not be able to deduct it at all, because you can't take tax benefits on something you can be reimbursed for, but chose not to. IRS might claim that you quitting your job is choosing not to get reimbursement you would otherwise get. I couldn't find from my brief search any examples of what happened after such a decision.

3. You can claim it was a loan, but I doubt the IRS will agree. The employer most likely reported it as an expense.

4. If the IRS don't contest based on what I described in #2, and you haven't paid taxes on the reimbursement (#1), I'd say what you did was reasonable and should be accepted (assuming of course you otherwise qualify for all the benefits you're asking for).

I would suggest getting a professional advice. Talk to a EA or a a CPA in your area. This answer was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer