Section 127 limit 2027: the tax-free tuition cap rises to $5,400
For 41 years an employer could pay $5,250 of an employee's education tax-free. For taxable years beginning in 2027 the IRS has raised it to $5,400, the first change since 1986.
- 2027 limit: $5,400 per employee, for taxable years beginning in 2027 (IRS Rev. Proc. 2026-35, section 3.17, released 5 November 2026, read 7 November 2026).
- 2026 stays $5,250. The increase applies from 2027 onward, and the IRS will publish a new figure each year.
- Same rules otherwise: tuition, fees, books, supplies and student loan payments all share the one limit, and the limit covers all your employers combined.
- 1978$5,000Revenue Act of 1978 creates the exclusion
- 1986$5,250Tax Reform Act of 1986 sets the cap
- 2020loans addedCARES Act adds student loan payments
- 2025indexingLoan payments made permanent; cap indexed after 2026
- 2026$5,250Last year at the 1986 figure
- 2027$5,400First adjustment, Rev. Proc. 2026-35
What exactly changed for 2027?
The One Big Beautiful Bill Act of 2025 made the Section 127 cap adjust for the cost of living for taxable years beginning after 2026. On 5 November 2026 the IRS published the first adjusted figure in Rev. Proc. 2026-35, its annual list of inflation adjustments: for taxable years beginning in 2027, an employee can exclude up to $5,400 of educational assistance from gross income.
That is $150 more than the figure Congress set in the Tax Reform Act of 1986. Before 1986 the cap was $5,000, set when the exclusion was created in the Revenue Act of 1978.
What is the extra $150 worth?
Tax saved assumes the full cap is used at a 22% federal bracket, 7.65% employee FICA and a 5% state rate, the same assumptions as our cap checker. The bars are drawn to scale. Your own figure depends on your bracket and state.
What should employees do?
If your employer already pays the full $5,250, ask whether it will pay up to $5,400 in 2027. The tax exclusion rises on its own, but what your employer actually pays is set by its plan, not by the IRS. Anything an employer pays above the limit is taxable wages unless another rule, such as a working condition fringe benefit, covers it.
If your education spending straddles the year end, the calendar matters: a payment made in 2027 counts against the 2027 limit, so a course paid for in January 2027 can use the higher figure.
What should employers check?
For the plan rules, the eligible expenses and the audit points that apply every year, read our complete Section 127 guide, which now includes a cap checker for both 2026 and 2027. To compare your plan with what 66 other US employers publish, see our tuition benefits lookup. The other education figures that moved for 2027, from student loan interest to 529 gifts, are in 2027 education tax numbers.
Frequently asked questions
What is the Section 127 limit for 2027?
$5,400 per employee for taxable years beginning in 2027, set by the IRS in Rev. Proc. 2026-35, section 3.17, released 5 November 2026. For 2026 the limit stays $5,250.
When did the $5,250 cap last change?
In 1986. The Revenue Act of 1978 created the exclusion at $5,000 and the Tax Reform Act of 1986 raised it to $5,250, where it stayed until the 2027 inflation adjustment.
Do student loan payments count toward the $5,400?
Yes. Employer payments on qualified education loans count toward the same annual limit as tuition, and the IRS FAQ updated in 2026 treats loan payments as excludable with no end date.
Does the limit apply per employer?
No. The limit applies to the total benefit from all employers with qualified educational assistance programs, so two jobs do not double it.
Sources, read 7 November 2026: IRS Rev. Proc. 2026-35 (section 3.17); IRS FAQs on educational assistance programs; Congressional Research Service, RS22911 (history of the cap). Not tax advice.