Quick heads-up on a positive change coming to our education benefits starting after the 2026 tax year, the $5,250 annual tax-free limit is officially getting an inflation protector. The limit will now be indexed to the cost of living, so as prices go up, the maximum amount folks can receive tax-free is likely to increase, too. Again, this is starting in 2026 for tax filing in 2027.
- The amount up to the limit is excluded from the employee's gross income, meaning it is not reported as wages on their Form W-2 and is not subject to income or payroll taxes.
- The funds can be used for both undergraduate and graduate-level courses.
- Payments toward the principal or interest of an employee's qualified education loans are included in this $5,250 annual limit.
- The education does not need to be job-related to qualify for the Section 127 exclusion.
- Beginning with the 2027 tax year, the $5,250 cap will be indexed for inflation and is expected to increase over time.
- The benefit is for the exclusive use of the employee and cannot be used for the education of a spouse or dependents.
- Unused amounts of the annual limit cannot be carried forward to subsequent years.