J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

3.7 Education Assistance Plans

If your employer pays for job-related courses, the payment is tax free to you provided that the courses do not satisfy the employer’s minimum education standards and do not qualify you for a new profession. If these tests are met, the employer’s education assistance is a tax-free working condition fringe benefit (3.9).

Even if not job related, your employer’s payment for courses before 2013 is tax free up to $5,250, provided the assistance is under a qualifying Section 127 plan meeting nondiscriminatory tests. Graduate courses qualify for the exclusion as well as undergraduate courses. The Section 127 exclusion covers tuition, fees, books, and equipment, plus supplies that you cannot keep at the end of the course. Lodging, meals, and transportation are not covered by the exclusion. Sports or hobby-type courses qualify only if the courses are related to your business or are required as part of a degree program.

Tuition reductions.

Employees and retired employees of educational institutions, their spouses, and their dependent children are not taxed on tuition reductions for undergraduate courses provided the reduction is not payment for teaching or other services. However, an exclusion is allowed for tuition reductions under the National Health Services Corps Scholarship Program and the Armed Forces Health Professions Scholarship Program despite the recipient’s service obligation. Widows or widowers of deceased employees or of former employees also ...