Patrick W. Thomas
Professor of the Practice, Notre Dame Law School
Following up on my post on the taxation of graduate student tuition waivers in the GOP tax bill, there have been a few new developments. (By the way, my fellow Hoosier from the opposite end of the state, Michael Austin, along with Sam Brunson, have a great post on the proposed repeal of section 117(d) as it affects university employees and their dependents.)
First, it’s been confirmed that the intent of the House bill (if not necessarily the effect, per my post) is to tax graduate student tuition waivers, for those graduate students who work in a research or teaching assistant role. According to an article in The Verge, a spokesperson from the Ways and Means Committee explicitly indicated as much in an email. While Congressman Brady did release an amendment to the bill Monday (text here) and a subsequent amendment on Thursday (text here), none of the education provisions were affected. Additionally, the bill (incorporating Congressman Brady’s amendments) was reported out of Ways and Means on a party line vote on Thursday.
Second, a small clue into a possible response of universities, if this provision makes it into law. On Thursday, graduate students at the University of Notre Dame received an email indicating that the University would not treat tuition waivers as taxable income, even under the new law. The email stated that the University provides tuition “scholarships,” not tuition waivers or reductions. The email also states that such a scholarship continues even if a student ceases to be a research assistant—which could mean the student would not be an “employee” of the University, as called for by section 117(d). Presumably, the University views these graduate student tuition benefits waivers as qualified scholarships under section 117(a). The University also notes that the scholarships are not granted because of the services that the graduate student provides; rather, it provides the scholarships to potentially all students, regardless of the services provided.
One potential issue I see is whether the University’s position comports with the facts on the ground. In the STEM and other research-intensive fields (e.g., Anthropology, Psychology), graduate students working towards a traditional Ph.D. degree are, upon admission, expected to eventually work in a lab for a supervising professor as a research assistant. Likewise, in humanities programs, students are expected to work as teaching or research assistants, depending upon the program. Indeed, 94% of Notre Dame doctoral students do receive stipends through either fellowships (which provide more generous stipends) or teaching and research assistantships for work in such settings. 97% of Notre Dame graduate student receive tuition reductions. So, for these programs, where the initial grant of a scholarship/tuition reduction occurs upon admission and the vast majority of students receive this benefit, it’s hard to square their economic reality with the University’s statement.
What about the other 6% who do not receive stipends? For those who receive tuition relief, but not a stipend, and are working for the University (as most programs require), the IRS could argue that the University provides tuition reductions for these students due to the work performed, notwithstanding the University’s stated policy to grant tuition reductions generally to graduate students. So, I question whether the IRS would take at face value the claim that doctoral students are not employees receiving tuition reductions.
The University does point out that, “in cases where a student may cease to be a research assistant, the tuition scholarship remains.” My understanding, however, is that any graduate student who ceases to be a research assistant would then become a teaching assistant. If a student somehow lost both his or her teaching and research assistantships, that student is likely in trouble with his or her program of study (or, perhaps, has taken a leave of absence). While the University claims that it does not revoke tuition reductions for such students, I’m not sure that matters. If the student does not receive a stipend and yet performs services for the University, there is a strong argument that the tuition reduction is included in gross income. And if a student is potentially subject to dismissal from their program, the IRS may view this as a penalty that causes the tuition reduction to effectively require the student to render services to the University. It’d be helpful to hear from a graduate student who has in fact left his or her position as a teaching or research assistant, while still continuing to receive a tuition waiver.
In any case, it’s not clear that all universities would take the same position. I’d be interested to hear responses from administrators at other institutions. And, even if a university classified the tuition reduction as non-taxable, that reduction would be reported on a Form 1098-T, which presumably also notes that the student is a graduate student. That could flag the IRS, if it views the remission as taxable, to audit the individual students to whom the reduction was given. The student could then make an argument along the lines of the one in my prior post. Of course, if the proposed regulation is withdrawn, this argument is less likely to succeed.
Finally, the Senate Finance Committee has issued its own tax bill, which differs in many respects from the House bill. One of the most significant substantive differences is the education related tax provisions in the bill. The Senate bill retains the following tax preferences for education in the Code:
- Student Loan Interest Deduction (IRC § 221)
- Lifetime Learning Credit (IRC § 25A(c))
- Non-taxable tuition waivers under section 117(d), including graduate student tuition waivers
- Non-taxable tuition waivers under section 127
Additionally, it seems the Senate Finance Committee has specifically become aware of the issue regarding graduate student tuition waivers. In a summary of its bill, the Committee notes that the bill “preserves additional important elements of the existing individual tax system, including . . . Education relief for graduate students.” That can only point to either (1) the tuition waivers under 117(d) or (2) the Lifetime Learning Credit. Both are important to graduate students, though the latter is much more important to those paying out of pocket for their graduate education, such as law and business students. So I’m heartened to see some indication that policymakers are seriously considering this issue in the bill.
Forgoing the revenue from repeal of the education provisions—$64.1 billion over 10 years—will also inform the rest of the legislative process. However, that lost revenue is paltry compared to some of the other revenue-generating items (e.g., $1.26 trillion from the repeal of certain itemized deductions). See the Joint Committee on Taxation’s estimated revenue effects on the original House Bill for more detail on the fiscal effects. Still, $64.1 billion is real money to the Congress, Treasury, taxpayers, and students.
Needless to say, there’s much work to be done in the House and Senate before either of these bills become law. And merely because the Senate bill includes these important tax preferences for education does not mean that they won’t be negotiated away in a conference committee.
Finally, it’s important not to lose sight of the more broadly impactful provisions of the various tax bills, even though particular provisions, like this one, might be more directly relevant to us individually or our immediate communities. Even if students and universities “win” on this issue, other tax changes could have damaging effects on students and those seeking higher education. This is especially true where effects of those changes are more ambiguous, such as in the new rate structures, the maximum pass-through rates for “small” businesses (or the 17.4% “standard” deduction for such businesses, as the Senate proposes), and the distributional effects of a corporate tax rate cut. I’m sure the contributors to (and readers of) this blog won’t take their eyes off the ball.