US - educational tax credit on imputed income for educational expenses?

Question

My wife is employed by a university. Up to a certain monetary amount, she can take classes with no financial or tax impact. (I believe this amount is set by the IRS but that's not at issue here.) Above that amount, the classes are still "free" -- i.e. no out-of-pocket expense -- but the money that she would have paid becomes imputed income.

She did take a number of graduate-level classes last year -- enough to push her into the imputed-income zone, I believe. No such income is called out on her W-2, but I don't know whether it ought to be or not. (She is recovering from a serious accident and does not remember.)
So my first question would be: if in fact there was imputed income related to the courses she took, should that be reported on her W-2?

My second and more important question is, would this qualify as an educational expense (for purposes of a deduction or educational credit)?

With respect to the second question, I can see an argument either way.
One point of view would be, this was an expense, but it was reimbursed so it doesn't qualify. (Although I don't see reimbursement as a criterion anywhere.)
The other point of view would be, the university technically paid her the money with one hand but then took it back with the other hand as payment for the courses. And the monies appear to have been treated as taxable income (not tax-free educational assistance) ... so it seems as though I ought to be able to claim the credit.

Update / Clarification:
One might wonder why I didn't just ask the university payroll department. In my experience, directing a question to that group frequently results in "opening a can of worms". So my goal here was to try to find out whether it would even be worth approaching them with this question.

Answer 1

I haven't dealt with this kind of thing in any way, but I found some quotes from IRS publications which I think are relevant and hopefully help.

If in fact there was imputed income related to the courses she took, should that be reported on her W-2?

Your scenario sounds to me like a Qualified Tuition Reduction as described in Publication 970 Tax Benefits for Education. It appears the rules are different for graduate study as opposed to pre-graduate work, though I don't see anything about any dollar amount limit. There are various requirements and exceptions, so hopefully reading through that section of the publication can help you understand whether the benefit is supposed to be taxable. If taxable, it should show up on your W-2 like any other income:

Any tuition reduction that is taxable should be included as wages on your Form W-2, box 1. Report the amount from Form W-2, box 1, on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ).

It doesn't appear that there is any special designation or box for the tuition reduction as opposed to "normal" work, it just is income that's been earned like any other. If you need guidance on how much of the income is for "normal" work and how much is for the tuition reduction, you probably need to see if you can figure it out from her pay stubs, or contact the university's HR department.

Would this qualify as an educational expense (for purposes of a deduction or educational credit)?

Well, looking through the credits I see in Publication 970, there appear to be two possible credits:

The "American opportunity credit" section, under "No double benefit allowed", says things like (my emphasis added):

You can't do any of the following.

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• Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. See Adjustments to Qualified Education Expenses next.

My understanding from reading through the section is that expenses are only excluded if they were tax-free, so that there can't be a double-dipping of benefits. If they're included as taxable income, I think they would count under your second interpretation, that the employer paid them like any other income, and your wife spent them as educational expenses just like other students, and they would qualify for educational credits.

In fact, it explicitly states:

Don't reduce qualified education expenses by amounts paid with funds the student receives as:

• Payment for services, such as wages;

Which sure sounds to me that anything that counts as W-2 Box 1 "Wages" would be payments received that then the expenses were logically paid separately from.

The other credit, the "Lifetime Learning Credit", appears to use identical language (No double benefits; and don't reduce by wages).

Obviously this is just from my looking through Publication 970; there may be more nuances here and for "real" advice you may want to speak more to the university HR department (who perhaps have dealt with this before) and/or a real tax advisor. You might also see if you can get any sort of a "receipt" or even a Form 1098-T from the university of what amount was paid on your wife's behalf, to help document it is truly that she was just paid more wages and spent them on classes as far as tax law is concerned.