In Spring 2011, the University announced that it would begin withholding tax on GA and PGA tuition waivers. The situation has changed and developed since then, but it has not gone away and no permanent solution has been created.
Below is an updated FAQ about the tuition waiver tax issue, as well as a summary of the GEO’s ongoing efforts to help those graduate students who are affected by it. Although PGAs are currently prohibited by law from the Bargaining Unit and are therefore not protected by our contact, the GEO is making every effort to help both GAs and PGAs deal with this problem. Because PGAs are not in the Bargaining Unit, we do not have their contact information! If you know a PGA, please share this information with them!
1. Why are GAs and PGAs being taxed on their tuition and fee waivers, but TAs and RAs are not?
Tuition waivers are considered to be taxable benefits. Internal Revenue Code 117 states that
In the case of the education of an individual who is a graduate student at an educational organization described in section 170(b)(1)(A)(ii) and who is engaged in teaching or research activities for such organization, tuition and fee waivers shall be exempt from taxation.
The University of Illinois is interpreting this to mean that only those graduate employees whose titles are officially “TA” or “RA” are exempt from tuition waiver taxation.
2. Are undergraduate’s tuition waivers taxed similarly?
No, undergraduate tuition waivers are entirely tax-exempt.
3. Why did this start to happen in 2011? Did the law change?
No, the law did not change.
In November, 2003 the University withheld tuition waiver tax from graduate assistants who did not (or could not truthfully) fill out a form asserting that the bulk of their duties were related to instruction or research.
University Payroll has stated that after 2003 individual units incorrectly reported the status of graduate employees, and so the Bannar system erroneously coded GAs and PGAs in the same way as TAs and RAs for the purposes of tax withholding on tuition waivers. University Payroll claims to have discovered the coding error after the beginning of the 2010-2011 academic year.
4. What has the University done to offset the burden for its graduate students?
When the change was first announced, the University proposed no action.
Under pressure from the GEO, the University awarded one-time grants to affected students.
In February, 2012, after pressure from affected students, the University stopped withholding taxes at the fixed rate of 30% and instead is now treating tuition waiver as additional income and withholding at a graduated rate. This is consistent with IRS guidelines for reporting taxable tuition waivers.
5. Why is my paycheck so much smaller in Fall than in Spring?
Internal Revenue Code 127, Educational Assistance Program, provides a tax exemption for the first $5,250 worth of tuition and fee waiversin a given calendar year. Any GA or PGA who holds their appointment for a full academic year, particularly if he or she receives an out-of-state tuition waiver, is likely to use up this exemption in the Fall. This means that the Spring semester will result in a much heavier tax burden than the Fall semester.
6. Why are taxes being withheld from only two paychecks?
University Payroll has stated that the first monthly paycheck is too early to be withheld from—they need time to determine tax liability (they call this the “data run”). University Payroll has also stated that they do not wish to withhold from the last paycheck, which they wish to keep for arrearage.
The GEO continues to encourage the University to allow graduate students to choose over how many months their tax burden is spread.
7. What is arrearage?
For some graduate students, two paychecks are not sufficient to meet their tax burden. These students will receive two $0 paychecks and will then have the remaining tax withheld from the last paycheck of the semester. If even this is not sufficient then the last paycheck will also be $0, the University will pay whatever tax is remaining, and that leftover tax will be counted as income.
8. $0 paychecks? Are those likely?
Last year many graduate students received $0 paychecks. Now that the University has switched to a graduated rate, fewer students are expected to. This is because graduate students earn too little to be taxed at a 30% rate, particularly students with spouses and dependents.
9. If the University can cover the “left over” tax, why do they need an arrearage month?
We asked Payroll this, suggesting that they spread the tax burden over three paychecks and then pay whatever arrearage exists at the end. Their response is that it is “undesirable” for the University to pay a portion of your tax burden. They want the last pay period to remain available for corrections.
10. Do other universities interpret the tax law in the same way?
Most universities do not face the issue at all because their graduate employees are all classified as TAs or RAs. This is not the case at Illinois; although many GAs and PGAs have been reclassified since Fall 2011, at least 100 graduate students are still affected. Some universities call tuition waivers “scholarships”, which might affect their taxability.
If you know of any other university where this is happening, please let us know about it! We have heard a few rumors.
The GEO’s response:
1. At the start: The GEO made one-time emergency gifts to affected GAs and PGAs when this new policy was first announced in Spring 2011. Now: The GEO again made one-time emergency gifts, totaling $10,000, in Fall 2011.
2. At the start: The GEO had conversations with the administration and with Illinois legislators. We encourage our state and national legislators to work to change this law. Now: The GEO tax committee continues to meet with Payroll, Administration, Chancellor Wise, the Faculty Senate, and the Student Senate on this issue. An ad hoc committee has been formed at the University level, and we have requested representation on that committee.
3. At the start: The graduate employee unions from all three UI campuses united in calling for a joint meeting of the relevant administrators from each campus, to give the administrators a chance to reconcile their sometimes conflicting statements. Our invitation was rejected; the University claimed that each campus would prefer to deal with their graduate employees separately. Now:University Payroll held sessions on all three campuses. This was structured to be an informational workshop about how the withholding would work, but both students and faculty took the opportunity to let our dismay be heard.
4. At the start: The GEO, in Labor Management Meetings, urged Human Resources to ensure that graduate students would know that their summer tuition would also be subject to taxation if they had held a GA or PGA position in the Spring. Now: The GEO continues to urge Academic Human Resources to make this tax burden clear to incoming and continuing students. We urge departments to make it clear to their incoming students that a GA or PGA appointment is not financially equivalent to a TA or RA appointment, even if the yearly wage is the same.
5. In the future: Can we change the tax law?
The tax law is clearly ill-formed and misapplied. We should continue to make sure our legislators know what a problem it is!
In 1997, the GEO launched a campaign protesting a House law that would have left all tuition waivers open to taxation (House Bill H.R. 2014). Members wrote, called, and emailed Representative Ewing, Senator Mosely-Braun, and Senator Durbin to encourage them to vote to leave tuition waiver tax exemptions intact.
This page is for illustrative purposes only and should not be considered tax advice. You should additionally consult a tax professional for information about your particular situation.
Do you want to learn more? Contact the GEO at email@example.com.