Section 127 exclusion
How tuition reimbursement tax works in 2026
Many employers offer education assistance programs that pay for tuition, fees, books, or student loan payments. Under IRC Section 127, the first $5,250 of these payments per calendar year is excluded from your taxable income — no federal income tax, no Social Security, no Medicare. Amounts above $5,250 are added to your W-2 as taxable wages.
What the exclusion covers
Qualified expenses include tuition and fees, books and supplies, equipment, and — since the Consolidated Appropriations Act of 2021 — employer payments toward student loan principal and interest. Graduate and undergraduate programs both qualify. The $5,250 cap is per calendar year, not per academic year, and is shared between tuition reimbursement and loan repayment assistance from the same employer.
| Reimbursement | Tax-free | Taxable excess | Tax saved (27% bracket) |
|---|---|---|---|
| $3,000 | $3,000 | $0 | $1,039 |
| $5,250 | $5,250 | $0 | $1,818 |
| $8,000 | $5,250 | $2,750 | $1,818 |
| $15,000 | $5,250 | $9,750 | $1,818 |
Tax saved = what the $5,250 exclusion keeps out of taxes at a 27% combined rate + 7.65% FICA.
Tax on the excess
If your employer reimburses more than $5,250, the excess is taxed as supplemental wages. The employer may withhold at the flat 22% rate or include it in your regular paycheck withholding. FICA also applies to the excess: 6.2% Social Security (up to the $184,500 wage base, SSA 2026) and 1.45% Medicare. Use our paycheck calculator to see the impact on your overall take-home.
Questions
Tuition reimbursement tax FAQ
Is tuition reimbursement taxable?
The first $5,250 per calendar year is tax-free under IRC Section 127, for both the employee and the employer. Any amount above $5,250 is taxable as supplemental wages — your employer withholds federal income tax, Social Security, and Medicare on the excess. This limit covers tuition, fees, books, supplies, and qualified student loan payments.
What is the $5,250 limit for 2026?
The Section 127 education assistance exclusion remains at $5,250 for 2026. This is a per-calendar-year limit, not per academic year. Starting in 2027, the limit is scheduled to be indexed for inflation. The limit is shared between tuition reimbursement and student loan payment assistance from the same employer.
Does tuition reimbursement cover student loan payments?
Yes. The Consolidated Appropriations Act of 2021 made employer student loan repayment assistance a permanent part of Section 127. Employers can pay up to $5,250 per year toward an employee's qualified student loan principal or interest, tax-free. This amount shares the $5,250 cap with tuition and other education expenses.
How is the taxable portion of tuition reimbursement withheld?
The amount above $5,250 appears on your W-2 as taxable wages. Your employer withholds federal income tax at your regular W-4 rate or the 22% supplemental rate, plus FICA (6.2% Social Security up to $184,500 and 1.45% Medicare in 2026). State income tax applies as well.
Can I claim education tax credits on top of Section 127?
You cannot double-dip. Expenses paid by the employer's Section 127 program cannot also be used to claim the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLC). However, if you pay additional education costs out of pocket above what the employer reimburses, those may qualify for credits separately.
- Sources: IRC Section 127 ($5,250 education assistance exclusion) · CAA 2021 (student loan payments added permanently) · IRS Rev. Proc. 2025-32 · SSA 2026 wage base $184,500.
- 🔄 Last updated July 25, 2026 · Tax year 2026
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