@MidAtlanticDad posted:All good info and important to understand, but the taxable portion of your tuition reimbursement will be taxed at your highest rate, right? I would still encourage any kid to take advantage of it, but just know that part of it will be treated like taxable income.
It's just income like any other income. Keep in mind, though that some of that will be deductible or provide credits. It's not like scholarship money. It's like they gave you x amount as additional income and then you spent it on school. You can use the American Opportunity Tax Credit to get your first $2000 back as a tax credit and 25% of the next $2,000 for an additional tax credit. That's not a deduction off your taxable income, but cold hard cash. So, let's look at out $200K earner and say he gets an extra $30k for school. His taxable income jumps to $217,800. The taxes on that extra $30k would be 32% on the first $19,550 ($6,256) and 35% on the remaining $10,450 ($3,657.50).
So the extra school money cost him $9,913.50 in extra taxes minus $2,500 for the tax credit. That's an additional tax bill of $7,413.50 or $24.7%. Of course, that's for a guy making $200k IN THE YEAR IN WHICH HE GOES BACK TO SCHOOL.
The most likely scenario is the guy isn't getting that money in a year where he's still pulling down $200K for playing baseball. Instead, let's say he takes some other work and pulls in $25,000 for the year plus goes back to school.
$25K + $30K for school is $55K for the year.
He gets his $12,400 single payer deduction (we're assuming ZERO other deductions). So, his taxable income is $42,600.
The first $9,875 at 10% ($897.50)
The next $30,250 at 12% ($3,630) and
The remaining $2,475 at 22% ($544.50)
Total tax: $5,072
Gets back a $2,500 credit
Tax bill: $2,572
That's an effective tax rate of 4.7%
Wow. Bottom line is you don't want to use those credits in the same tax year in which you're getting a big paycheck from the club. A guy getting a $200k check right now who wants to use that money THIS fall is making a huge financial mistake.