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Let's say I plan on attending graduate school part-time and that I am currently employed full-time at a company that offers full tuition reimbursement for graduate school with the catch that I must work at the company for X years after reimbursement.

Assume that affordability is not an issue and that we are solely looking optimize this expense based on taxes, etc.

If I pay for graduate school out of pocket, I can take advantage of various tax deductions such as Lifetime Learning Credit and/or Tuition and Fees Deduction. In this scenario I pay an amount less than full tuition from existing income.

If I take advantage of my employer's tuition reimbursement program and stay X years, my tax burden is only on what is above the IRS's limit on tax-free tuition reimbursement ($5,250 as of 2017). In this scenario I pay only taxes on some of the new income used towards tuition. It doesn't touch existing income.

If I take advantage of my employer's tuition reimbursement program and leave the company in the future before X years, I have to pay back my reimbursement to the employer. My understanding is that I do not get to claim this on my taxes in any way. This means that I pay full tuition from existing income.

Is it correct that I have no claim to tuition tax benefits if I have to repay tuition assistance to my employer? If so, it leads me to believe that my employer's tuition assistance is only useful if I know for a fact that I will stay at the company for X years.

  • How much will your tuition/fees/books cost per year? – Hart CO Nov 14 '17 at 17:59
  • @HartCO Let's say greater than the IRS limit of $5,250 but lower than $10,000. – Ethan Nov 14 '17 at 18:02
  • How does your company tuition reimbursement set up? Do they pay the school directly, or do you pay the school and then they pay you? – DJClayworth Nov 14 '17 at 18:03
  • @DJClayworth I believe both are acceptable. – Ethan Nov 14 '17 at 18:09
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Let's say your marginal tax rate is 20% (since that's the same rate used for the Lifetime Learning credit).

So your choice is: pay 80% (after the tax credit) of your tuition out-of-pocket or let your employer pay 100% and you pay 20% in taxes (since it's effectively income to you)?

Unless you are very likely to leave your employer before X years, I see no practical reason NOT to take the tuition reimbursement benefit from your employer.

You might be able to claim a tax credit for the repayment if necessary (I'd have to look it up), but that would only help you if you left the company.

Either way, I'd take the reimbursement and risk having to pay it back.

  • Is there any way to find out if I can claim the tax credit for repayment if I left the company? That would answer the question in its entirety. – Ethan Nov 15 '17 at 18:17
  • ttlc.intuit.com/questions/… – D Stanley Nov 15 '17 at 19:31
  • Paraphrasing: any tuition reimbusement that was taxed is deductible if you have to pay it back. – D Stanley Nov 15 '17 at 19:32
  • The combination of answer and comments answers my question. If you wish, you may incorporate your comment into the answer. – Ethan Nov 15 '17 at 19:52

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