Tax day is right around the corner. Every year, I hear the same questions from police union members regarding certain contractual benefits and how they effect taxation. The two biggest issues that seem to come up year after year are tuition reimbursement and take home cars. Everyone seems to have a different opinion as how these benefits are taxed, or if they are taxed at all. So, here are the facts right from the IRS guidance in Publication 15-B (2021).
We will start with tuition reimbursement. We know that educated officers are a great benefit to the communities they serve. Numerous studies have shown that police officers with college degrees are better communicators, have fewer citizen complaints, and use force less often. This keeps liability down, thus insurance costs down. As a way of incentivizing officers to go to college, many departments offer some level of tuition reimbursement. However, that benefit may be taxable.
Many departments offer partial tuition reimbursement, but some offer full reimbursement. Any tuition assistance police officers receive over $5,250 is taxable and must be included in your taxable wages calculation. As an example, for an officer whose department fully reimburses said officer for attending college at a cost of $20,000, the officer will have to pay taxes on $14,750. The first $5250 is tax free.
The second question involves take home cars. Many police departments provide take home cars to certain administrators, supervisors, and investigators. Many believe this is a taxable benefit, and in the private sector, that is absolutely true. A take home vehicle that you have full personal use of is a very lucrative benefit, thus taxable. Notwithstanding, there are two exceptions for police vehicles. The first exception involves marked vehicles that are not for personal use. The exception reads, “clearly marked, through painted insignia or words, police, fire, and public safety vehicles, provided that any personal use of the vehicle (other than commuting) is prohibited by the governmental unit.” The second exception involves unmarked vehicles where personal use is allowed. That exception reads, “unmarked vehicles used by law enforcement officers if the use is officially authorized. Any personal use must be authorized by the employer, and must be related to law-enforcement functions, such as being able to report directly from home to an emergency situation. Use of an unmarked vehicle for vacation or recreation trips can’t qualify as an authorized use.” If a police officer’s take home car falls under one of the two exceptions, the car is not a taxable fringe benefit, thus, not included in tax calculations.
In the end, both a tuition reimbursement program and a take home car can lift large financial burdens. With or without tax implications, I believe both are worth having. Please contact your accountant or tax preparer to learn more about how your personal financial situation and how your benefits impact your state and federal income taxes.