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Educational assistance refunds.

Employers and employees who participated in employer-provided educational assistance plans in 1995 or 1996 are entitled to refunds. Before 1995, Internal Revenue Code section 127 provided an employee with an annual exclusion from income of up to $5,250 for educational assistance benefits (EABs). Under the Small Business Job Protection Act of 1996, this exclusion was reinstated and made retroactive to January 1, 1995.

Employees who previously paid taxes on EABs now can get refunds for federal income taxes paid in 1995 and Social Security and Medicare taxes paid in 1995 and 1996. Employers can obtain refunds for Social Security, Medicare and unemployment taxes.

The Internal Revenue Service has made it easier to get these refunds. IlKS information release 96-36 said employees who paid income taxes in 1995 on excludable EABs can receive their refunds simply by filing Form 1040X, Amended U.S. Individual Income Tax Return, and attaching Forth W-2c, Statement of Corrected Income and Tax Amounts, showing the corrected wages for 1995. To expedite the process, taxpayers are advised to print "IRC 127" in the top margin of form 1040X. Employees who qualify for the earned income credit should read IRS publication no. 596.

For both 1995 and 1996, employees will receive their Social Security and Medicare tax refunds from the employers that provided the educational assistance. Employees whose 1995 wages (excluding educational assistance) exceeded $61,200, or $62,700 in 1996, are entitled only to Medicare tax refunds. Employees who are unable to get their tax refunds from their employers must file Form 843, Claim for Refund and Request for Abatement.

Employers may claim refunds either by reducing their federal tax deposits or filing form 843. They must report these adjustments on Form 941, Employers Quarterly Federal Tax Return, and Form 941c, Supporting Statement to Correct Information.

Observation: Retirement plans and individual retirement accounts should include EABs in employees' 1995 income. This will prevent adjustments in the plans from the reinstatement of the exclusion. In addition, the reduction in adjusted gross income from the retroactive exclusion may allow some taxpayers to treat previously nondeductible 1995 IRA contributions as deductible. To do this, the corrected nondeductible contribution amount should be added to Form 8606, Non-deductible IRA Contributions, IRA Basis and Nontaxable IRA Distributions, and attached to form 1040X.

--Michael Lynch, CPA, Esq., associate professor of accounting at Bryant college, Smithfield, Rhode Island.
COPYRIGHT 1996 American Institute of CPA's
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Author:Lynch, Michael
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Dec 1, 1996
Words:394
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