Is a graduate degree a luxury item?
Apparently some members of Congress think so. Their decision this summer not to renew the tax-exempt status of some types of employer-paid graduate school benefits was based largely on the belief that such subsidies amount to employee perks, like excessive life insurance or paying moving costs.
And like those other benefits, said the Congress, the dollar value of employer-paid for-credit graduate courses not directly related to job performance should be taxed as if it were regular income. That translates to a 28 percent base tax (depending on the recipient's income level), plus 7.65 percent Social Security tax and an additional 7.5 percent for the state of Maryland. In total, the graduate education benefits tax works out to slightly more than 43 percent of the value of the benefit.
Beginning this past June 30, any student enrolled in any university who is receiving graduate-level education benefits from an employer must now pay tax on those benefits.
For example, an employee receiving tuition reimbursement for two graduate-level classes in the business program of the School of Continuing Studies obtains $2,010 in educational benefits (six credit-hours at $335 per credit-hour). That employee is consequently liable for an additional $860 or so dollars in annual taxes. That money, needless to say, comes directly from the employee's paycheck.
For many families, that's quite a bite. So it is perhaps not surprising that when the new changes were announced recently a howl of dismay arose from students everywhere, at this university and across the nation. And although the Hopkins tax office and other departments are working to ameliorate the worst effects of the tax code change, it remains uncertain when--or even if--the new Congress will restore the previous tax-free status to graduate education benefits.
"Clearly we're not a proponent of these changes," said university controller Jerry Bridges, whose office was faced with the unhappy task of notifying several hundred university employees that their taxes were going up. "We are just as displeased with this situation as those receiving notice of the changes. But federal law requires that we withhold these additional taxes."
In a letter that went out from the controller's office Oct. 4, university employees receiving graduate school tuition remission were informed that in cases where classes were not job-related the appropriate taxes would be withheld on a prorated basis for the last four pay periods of 1996 (Nov. 15 through Dec. 31). In addition, any spouse or dependent using the tuition remission program will be liable for the tax (regardless of job-relatedness) which will be subtracted from the Hopkins employee's paycheck in the same way.
Each letter was accompanied by a form meant to help the tax office determine whether courses were job related on a case by case basis. Graduate tuition remission recipients were asked to return the completed form within three weeks to ascertain if their educational benefit would be taxed. The tax office notified respondents of their decision by Nov. 1; those who did not respond were automatically assumed to be liable for the tax.
Because of the unusual nature of the tax, which was held in legislative limbo until being signed into law by President Clinton on Aug. 20, the tax office and tuition remission program were not able to notify those affected by the change until relatively late. Instead of withholding the tax in equal payments throughout the entire semester, as will be done in the future, the university found it necessary to subtract the money in fewer, larger payments at the end of the year.
Recognizing that this arrangement can cause some employees undue financial hardship, the tax office has arranged to extend the payment plan into 1997 for anyone who can demonstrate need. Bridges urged university employees who are concerned about the effect of the tax on family income to contact the tax office immediately.
"We can arrange to spread the tax out anywhere from six to 10 payments," he said. "Our intent is that next semester the payments will be spread out during the full length of the course. Our tuition remission forms are currently being revised to alert students to the tax implications as they register so they can plan accordingly."
But will one of the ways students cope with the added costs be to forgo classes entirely? No one knows for certain.
"Anything that costs a student more money--through taxes or any other way--is going to affect enrollments," said dean of Continuing Studies Stanley Gabor. "The fact that graduate education is now, in effect, being taxed, means it will clearly have an impact."
Gabor views the entire decision to tax graduate education benefits as misguided. "The people behind this effort aren't sophisticated enough to see that economic development, international competition and the general health of American business often requires individuals to get an advanced degree," he said. "They don't see the importance of the master's degree."
In fact, said Gabor, part-time master's students are among the most effective and productive learners. "Adults who study part time are very demanding, serious and motivated. No one takes a master's degree that isn't serious about either advancing or changing careers. It seems incredible to me that in a country trying to remain internationally competitive we have in effect created another hurdle for our workers to overcome."
The fate of future legislation in this regard is uncertain. The bill President Clinton signed on Aug. 20 was not actually a new law, but rather, an extension of a previous Internal Revenue Code amendment known as Section 127. Originally adopted on a five-year trial basis beginning in 1978, the change in law was viewed as a means of simplifying the tax code and encouraging upward mobility through higher education. Section 127 proved so successful that it was renewed repeatedly on a year-to-year basis since then, though never made a permanent part of the tax code.
In 1994, the new Republican Congress, led by an effort in the House Ways and Means Committee, decided to eliminate the tax exemption for graduate educational benefits as a money-saving effort. At present, only the costs of undergraduate and trade school tuition can now be excluded from income (and thus taxes). Furthermore, the extension granted to students enrolled in these programs is due to expire May 31, 1997.
"While this kind of treatment is not unusual, it is arbitrary," said Maggie McIntosh, the university's associate for federal relations. "It unduly penalizes an institution like Hopkins, which has a historical commitment to graduate education. McIntosh has worked with the Maryland congressional delegation to try to emphasize the economic importance educational opportunities represent."
"Although there are certain members of Congress who don't understand the value of graduate education, I would not characterize the 1994 Congress as anti-higher education or anti-research and development," she said. "They understood the value our higher educational system contributes to the economy, and I believe the new Congress, which looks to be slightly more moderate, will continue to value our work as well."
McIntosh predicts that legislation previously introduced to make Section 127 a permanent part of the tax code (including the provision to exempt graduate school tuition costs from taxation) will be introduced again in the new Congress. "I can't say for sure what the chances are it will pass," she said. "But I can tell you for certain that Johns Hopkins will join with many other universities in supporting such a bill."
More information about this issue, including how it may affect students currently receiving graduate school tuition remission, is available at The Gazette Web site at http://www.jhu.edu/~gazette/octdec96/nov1196/remiss2.html.
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