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My employer has a tuition reimbursement program and I exceeded the $5250 tax exemption limit for the year. How are taxes calculated for this benefit?

The reason I ask is that my employer is withholding taxes equal to 42% of the reimbursement past $5250. That seems too high and I wonder how they arrived at that number.

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  • Is that 42% federal or federal, state, social security, Medicare...? Aug 18, 2016 at 20:58
  • Ya, it'll probably be at your top marginal rate (income tax + social security + medicare) which could relatively easily come to about 42% (if you have a high-ish income!)
    – Peter K.
    Aug 18, 2016 at 21:06
  • @mhoran_psprep: It's the total extra withholding they're deducting from my paycheck. I don't know the tax breakdown. Aug 19, 2016 at 13:59

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(a) In the long run, it doesn't matter. If they withheld too much, you'll get it back when you file your income taxes next year. Of course you may prefer to have the money now rather than next May.

(b) High as that sounds ... welcome to modern America. In 2015, a single person making between $37,451 and $90,750 must pay 25% federal marginal tax rate. Higher incomes pay more, up to 39.6%. I don't know what your state income tax is. Here in Michigan it's about 4%, let me use that as an example. Social security is another 6.2%. Medicaid tax is another 1.45%. Add that together and you have 25+4+7.65~=37%. So if you have a somewhat higher income, or a higher state income tax, or a city or other local income tax, it's not hard to see how you could hit 42%.

Oh, and you may have deductions besides taxes. Like if you contribute a percentage of your income to a retirement plan, they may be taking that percentage out of this too. In which case you're not losing that portion of the money: you're investing it.

Whenever I look at how much I'm paying in taxes, I always swell with pride at the thought of all the valuable government programs I'm supporting. :-)

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