I got some interesting tax advice from a fifth grader a few weeks back.
We had just completed a lesson about taxation without representation, in an activity where the kiddos were unfairly taxed pieces of candy based on silly things like what color shirt they wore that day. The lesson was intended to show why the colonists broke away from the British government and how unfair the British taxes were.
So when we asked the kids what they learned that day, a student (wise beyond his years?) replied:
“You should hide your money and your candy from the government!”
Now, no telling whether he had learned that concept from his parents…and we tried to steer him away from a life of tax evasion…but my recent experiences with tuition benefits suggest to me that the little man might be on to something.
An IRS rule states that any graduate tuition benefit over $5,250 in value per year that would qualify one for a new profession is taxable at the same rate as regular income. So, since SMU is generous enough to pay my tuition, I am taxed as though I receive about $17,000 additional income in the bank that I never actually see. SMU calculates up the taxes and deducts them from my paycheck over three pay periods each semester.
What that amounts to this semester is that in November, December and January, I take home about $1,000 less than I would in a normal month. Now, that may not seem like a big deal, but Addy needs her sweaters, after all.
I know I shouldn’t be complaining, since 95 percent of my fellow students are making far greater personal and financial sacrifices to make it through school. But something about this IRS rule seems screwy. Shouldn’t the government be encouraging people to take advantage of these benefits rather than taxing them for it? Isn’t the allowance of $5,250 a little unreasonable for those using these benefits at a private (more expensive) school like SMU? If they have to tax something, maybe the allowance should be a percentage of tuition rather than a flat rate.
Plus, it seems like the IRS is trying to have it both ways. I can’t claim the amount of tuition benefit as an educational expense on my tax return because one can only claim a credit on tuition paid out of one’s personal funds. But then they tax the tuition benefit as if it has been paid as part of my salary.
So it seems I can’t hide my money, my candy or my tuition benefit from the government. But I’d sure like to be in a position to help change this rule one day.