The IRS using IR-2026-55 reminds taxpayers and their employers that under IRC Sec 127 an employer may provide an employee tax free educational assistance up to $5,250.00 for tax years 2025 and 2025 adjusted for the COL in subsequent tax tears. These amounts are excluded Form W-2 Box 1 Wages, tips and other compensation.
IRC Section 127 educational assistance programs include payments for tuition, fees, and similar expenses, books, supplies and equipment. Including tax-free educational assistance benefits also include principal or interest payments on certain qualified education loans (as defined in section 221(d)(1) of the Code) incurred by the employee for the education of the employee. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses- but not Meals, lodging or transportation. Tools or supplies (other than textbooks) that you can keep after completing the course of instruction (for example, educational assistance does not include payments for a computer or laptop that you keep), Courses involving sports, games or hobbies unless they: Have a reasonable relationship to the business of your employer, or are required as part of a degree program.
The Internal Revenue Service today updated frequently asked questions in Fact Sheet 2026-10 related to educational assistance programs.
An employee’s gross income does not include educational assistance benefits if the benefits are provided under a section 127 educational assistance program and the amounts do not exceed $5,250. Under the One, Big, Beautiful Bill, the amount that may be excluded from gross income is adjusted for increases in the cost of living for taxable years after 2026. For calendar year 2025 and 2026, you won’t have to pay any tax on the first $5,250 of those benefits and your employer should not include those benefits in your wages, tips, and other compensation shown in box 1 of your Form W-2.
These frequently asked questions contain revised information about educational assistance programs generally, including how the rules apply to certain qualified education loans. They also provide updates related to the One, Big, Beautiful Bill amendments and provide a modified sample plan.
IRS previously issued FS-2024-22 providing answers to frequently asked questions related to educational assistance programs under section 127 of the Internal Revenue Code.
More information about reliance is available.