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Quick Hits
- The IRS has issued new guidance reflecting that the tax exclusion for educational assistance programs under Section 127 will be adjusted for inflation starting in 2027, while maintaining a flat cap of $5,250 for 2026.
- The guidance clarifies the permanent extension for tax-free employer contributions toward qualified education loans and clarifies that educator expenses can be claimed as itemized deductions starting in 2026.
The IRS updated its frequently asked questions (FAQs) related to educational assistance programs with the issuance of Fact Sheet 2026-10, which provides general guidance for taxpayers and tax professionals. The new fact sheet replaces a prior version issued in 2024 under the Biden administration.
Section 127 of the Internal Revenue Code allows taxpayers to exclude educational assistance benefits provided by their employers from their gross income if those benefits are provided under a qualifying educational assistance program. Under such programs, employers may provide tax-free educational assistance for tuition, fees, and similar expenses, books, supplies, equipment, and qualifying education loans. Payments may be applied to undergraduate or graduate coursework and do not have to apply to work-related courses.
Updates in the 2026 Fact Sheet
The new FAQs make three substantive changes compared to the FAQs released in 2024:
- Cost-of-Living Adjustment to the $5,250 Exclusion
The 2024 fact sheet indicated that the exclusion for educational assistance benefits was capped at a flat $5,250, which was the statutory limit prior to the OBBBA. While that cap remains flat at $5,250 for 2026, the OBBBA states that the amount will be adjusted based on the IRS’s “cost-of-living adjustment” (COLA) rounded to the “nearest multiple of $50.” The new fact sheet indicates the $5,250 cap will be “adjusted for increases in the cost of living for taxable years beginning after 2026.” That means, for tax years 2025 and 2026, taxpayers may exclude up to $5,250 of employer-paid educational assistance, and employers cannot include those benefits in wages, tips, or other compensation shown in Box 1 of Form W-2, according to the fact sheet.
- Permanent Extension of Qualified Education Loan Payments
The 2024 fact sheet stated that tax-free educational assistance benefits also include employer payments of qualified education loan principal and interest made “after March 27, 2020, and before January 1, 2026 (unless extended by future legislation).” The 2026 fact sheet removes the sunset date entirely, in accordance with the OBBBA, stating the benefit is simply available for payments beginning March 27, 2020, with no end date.
- Educator Expense Itemized Deduction (Starting 2026)
The 2026 fact sheet clarifies that the educator expense deduction claimed on “Form 1040 Line 11” may be claimed as an itemized deduction. The new fact sheet adds the following language not included in the prior version: “Starting in 2026, educator expenses may also be deducted as itemized deductions.” The deduction allows K-12 teachers to deduct “costs like books, supplies, computer equipment and software, classroom equipment and supplementary materials used in the classroom.”
Next Steps
Employers may want to note the exclusion for employees for educational assistance benefits paid by employers, which allows employers to provide up to $5,250 per year in tax-free benefits to employees, and that the cap is set to change with the COLA beginning in 2027. Employers may want to consider such programs in structuring their compensation and benefits programs, including whether to review and amend programs implemented prior to the enactment of the OBBBA.
Ogletree Deakins’ Employment Tax Practice Group will continue to monitor developments and will provide updates on the Employee Benefits and Executive Compensation, Employment Tax, and Higher Education blogs as additional information becomes available.
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