Recent Law Changes Affecting Education Tax Breaks
529 Plans. The TCJA liberalizes the Section 529 plan rules to allow federal-income-tax-free withdrawals of up to $10,000 per year to cover tuition at a public, private, or religious elementary or secondary (K-12) school. This change is permanent, for qualifying withdrawals made after 12/31/17. [See IRC Sec. 529(c) (7).] Obviously, this change does not affect adults who are going back to school to maintain or improve their business skills. Send us an email with any questions regarding education tax credits.
Above-the-Line Deduction for Tuition and Fees. Section 222 of the Internal Revenue Code allows you to claim a limited above-the-line deduction for eligible tuition and fees. Depending on your income, the maximum write-off is either $4,000 or $2,000 or nothing [IRC Sec. 222(e)]. This break expired at the end of 2017, but it was resurrected for 2018-2020 by the 2019 tax extenders legislation. When available, this break can help cover work-related education costs.
Miscellaneous Itemized Deductions for Employee Unreimbursed Work-Related Education Expenses. For 2018-2025, the TCJA suspends write-offs for miscellaneous itemized expenses that under prior law were subject to the 2%-of-AGI deduction threshold. Included in this category are unreimbursed employee business expenses. For 2018-2025, employees cannot claim miscellaneous itemized deductions for unreimbursed work-related education expenses. Obviously, this change is a big negative for employees who go back to school to improve or improve their business skills.
Multiple Breaks Create Confusion
It is often difficult to figure out which break is the most valuable when your client could claim several of them for the same education expenses. Therefore, we will cover them in order of how helpful they usually are-starting with Plan A and ending with Plan E. Note that Plan E, which is for self-employed folks, is often be the best option for them when available.
Plan A: Seek Company Reimbursements for Job-Related Education
An employer can reimburse an employee for certain job-related education expenses, and the reimbursements will be treated as tax-free working condition fringe benefit payments. In a nutshell, this favorable treatment is generally allowed if: (1) the education is required by your employer or by law or regulation in order for you to retain your current job, or (2) the education maintains or improves skills required in your current job.
However, the education cannot be required to meet pre-existing minimum educational standards for your current job, and it cannot train you for a new profession.
Tax-free fringe benefit treatment also applies when the employer covers the cost of education that meets the preceding guidelines by making direct payments to the educational institution rather than reimbursing the employee. [See IRC Sec. 162(a); Reg. 1.162-S(a); and Reg. 1.132-l(f) and -5(a).]
If your employer pays for education that does not meet the preceding standards (such as education that prepares you for a new profession), the payments count as taxable compensation to you-unless the payments are run through a Section 127 plan, as explained immediately below.
Key Point: When the client’s employer provides tax-free education benefits, that’s the best possible deal for the client because: (1) the employer pays the expenses, and (2) the employer’s generosity is tax-free to the client.
Plan B: Take Advantage of Section 127 Employer Educational Assistance Programs
Some lucky folks work at companies with educational assistance programs that can give each eligible employee up to $5,250 in annual federal-income-tax-free benefits. These plans are sometimes called Section 127 plans after the section in the Internal Revenue Code that allows them, and we will adopt that terminology here. The tax rules permit these plans to cover the cost of just about anything that constitutes education, including graduate coursework, whether the education is job-related or not. However, some Section 127 plans only reimburse for education that is job-related, which is understandable. In most scenarios, there are only two significant tax-law restrictions: (1) the education must be for your client, the employee, rather than for some another member of his family, and (2) the plan cannot pay for courses involving sports, games, or hobbies unless they relate to company business.
Key Point: When the client’s employer provides tax-free education benefits, that’s the best possible deal for the client because: (1) the employer pays the expenses, and (2) the employer’s generosity is tax-free to the client. Sweet!
COVID-19 Relief: The CARES Act allows Section 127 plans to make tax-free payments of up $5,250 towards an eligible employee’s qualified higher-education loans. Payments must be made between 3/27/20 and 12/31/20. Payments can be made to the employee or directly to the student loan lender. Payments can be for principal or interest. Qualified higher education loans are defined in the way as for purposes of the IRC Section 221 above-the-line deduction for up to $2,500 of annual student loan interest. [See IRC Sec. 127(c)(l)(B), as amended by CARES Act Section 2206(a).]
Education Tax Credits
There are two education tax credits.
American Opportunity Credit Can Cover Up to $2,500 of Undergraduate College Degree Program Costs.
The American Opportunity tax credit equals 100% of the first $2,000 of eligible post-secondary education expenses plus 25% of the next $2,000. The maximum annual credit is $2,500, assuming the AGl-based phase-out rule explained later does not apply.
Eligibility Rules. A student’s expenses are eligible for the American Opportunity credit as long as she has not already completed four years of college work as of the beginning of the tax year in question. The credit can be claimed for a maximum of four years for a particular student. However, those who use married filing separate status are completely ineligible.
Eligible expenses include tuition, mandatory enrollment fees, and course materials including books. However, optional fees for things like student activities, athletics, and health insurance do not count. Neither do room and board costs.
Key Point: Your client can claim a 2020 credit for eligible expenses that are paid in 2020 for: (1) courses in academic periods that begin in 2020 and (2) courses in academic periods that begin in January through March of 2021. Therefore, prepaying some expenses that are due early in 2021 could lower the client’s 2020 tax bill.
To cash in on the American Opportunity credit, the student must attend an eligible institution.
Fortunately, virtually all accredited public, nonprofit, and for-profit postsecondary schools meet this definition, and many vocational schools do too. The two main criteria are that the school must offer programs that lead to an associate’s degree, bachelor’s degree, or some other recognized credential; and the school must qualify to participate in federal student aid programs. An eligible school will have a Federal School Code, which you should be able to verify online at www.fafsa.gov.
The first big catch is that the American Opportunity credit is only allowed for a year during which the student carries, for at least one academic period beginning in that year, at least half of a full-time course load in a program that would ultimately result in an associate’s degree, bachelor’s degree, or some other recognized credential. So, while you have to be a fairly serious student to claim the credit, you do not actually have to intend to complete a degree or credential program. Therefore, this credit is potentially available to adult clients who are going back to school, as long as they have not already completed four years of undergraduate education.
Phase-Out Rule. The second big catch is the most damaging one for some folks. The American Opportunity credit is phased out (reduced or completely eliminated) if modified adjusted gross income (MAGI) is too high.
- The phase-out range for unmarried individuals is between MAGI of $80,000 and $90,000.
- The range for married joint-filers is between MAGI of $160,000 and $180,000.
- These ranges are fixed by statute and not adjusted for inflation.
- MAGI means AGI increased by income from outside the U.S. that is tax-exempt under IRC Sec. 911, 931, or 933.
Credit Can Offset Regular Tax and AMT and is 40% Refundable. The allowable American Opportunity credit amount (after any reduction under the MAGI-based phase-out rule explained above) can be used to offset the taxpayer’s entire federal income tax liability, including any AMT. In addition, 40% of the allowable credit amount is refundable. That 40% refundable credit amount is treated the same as federal income tax that was withheld or paid in via estimated tax payments. Any refundable credit amount that is left over the client’s tax bill has been reduced to zero can be collected in cash.
Alternatively, all or part of the refundable credit amount can be applied to the following year’s estimated tax payments. The example on the next page illustrates how the partial refundability concept works.
Example 1: Refundable American Opportunity credit.
- Ellen’s allowable American Opportunity credit for the year is $2,500. The refundable part of the credit is $1,000 (40% x $2,500), and that amount is treated on her Form 1040 as a tax payment (same as if she had the $1,000 withheld from her wages for FIT or paid it in via FIT estimated payments). The remaining $1,500 (60% x $2,500) is a nonrefundable credit that does not do Ellen any good unless she has a federal income tax liability.
- If Ellen does not owe any federal income tax because of deductions and/or other credits, the entire $1,000 refundable credit amount counts as a tax overpayment and is refunded to her in cash. In this case, the nonrefundable $1,500 part of the credit does not do Ellen any good, but the refundable credit deal gets her a $1,000 check from the government that she would not have otherwise received. Alternatively, Ellen can apply all or part of the $1,000 refundable amount to the following year’s estimated tax payments.
- Say Ellen’s federal income tax liability after deductions and/or other credits is $7,900. In this case, the nonrefundable $1,500 part of the credit is used to reduce her tax bill to $400. Then the first $400 of the refundable credit reduces her tax bill to zero. Finally, the last $600 of the refundable credit is refunded to her in cash. In this case, the credit wipes out Ellen’s entire tax bill, and the refundable credit deal gets her a $600 check from the Feds that she would not have otherwise received. Alternatively, Ellen can apply all or part of the $600 refundable amount to the following year’s estimated tax payments.
- Finally, say Ellen’s federal income tax bill is $4,500. In this case, the $1,500 nonrefundable part of the credit reduces her tax bill to $3,000. Then the $1,000 refundable credit further reduces her tax bill to $2,000. In this case, the credit simply reduces Ellen’s tax bill by $2,500, and that is the end of the story.
- The preceding results are determined by filling out Form 8863 (Education Credits) and transferring the applicable numbers to the applicable lines on Form 1040.
Warning: The 40% refundable credit privilege is not allowed to individuals who fall under the Kiddie Tax rules. For these children and young adults, the entire credit amount is treated as a nonrefundable credit. The Kiddie Tax rules can potentially cause part of an under-age-24 individual’s unearned income to be taxed at the parent’s higher marginal rates.
Lifetime Learning Credit Can Cover Up to $2,000 for Grad School and Other Training.
The Lifetime Learning credit equals 20% of up to $10,000 of eligible education expenses. This translates into a maximum annual credit of $2,000, assuming the AGl-based phase-out rule explained later does not apply.
Unlike the American Opportunity credit, there is no limit on the number of years the Lifetime Learning credit can be claimed, nor are there any degree program or course load requirements.
Therefore, the Lifetime Learning credit can be used to help offset costs for undergraduate study that drags on for more than four years, or for undergraduate years when the student carries a light course load, or for graduate school courses, or for courses to improve job skills or maintain professional certifications, or for courses taken for just about any other reason.
Key Point: Unlike with the American Opportunity credit, there is no partial refundability feature for the Lifetime Learning credit.
Eligibility Rules. You are ineligible for the Lifetime Learning credit if you’re married and don’t file a joint return with your spouse.
The maximum amount of annual expenses for which the credit can be claimed is limited to $10,000, regardless of how many students are in the family.
Finally, you can’t claim both the American Opportunity credit and the Lifetime Learning credit for expenses paid for the same student for the same year. However, you can potentially claim the American Opportunity credit for one or more students in the family while also claiming the Lifetime Learning credit for expenses paid for one or more different students in the family.
Eligible expenses for the Lifetime Learning credit include tuition and mandatory enrollment fees. Course supplies and materials (including books) are eligible expenses only if they are required to be purchased directly from the school itself. Other expenses, including optional fees and room and board, are off limits.
Finally, the school must be an eligible institution using the same definition as for the American Opportunity credit.
Key Point: Your client can claim a 2020 credit for eligible expenses that are paid in 2020 for: (1) courses in academic periods that begin in 2020, and (2) courses in academic periods that begin in January through March of 2021. Therefore, prepaying some expenses that are due early in 2021 could lower the client’s 2020 tax bill.
Phase-Out Rule. Like the American Opportunity credit, the Lifetime Learning credit is also phased out if modified adjusted gross income (MAGI) is too high. However, the phase-out ranges for the Lifetime Learning credit are at much lower income levels.
- For 2020, the phase-out range for unmarried individuals is between MAGI of $59,000 and $69,000.
- The range for married joint-filers is between MAGI of $118,000 and $138,000.
- MAGI means AGI increased by income from outside the U.S. that is tax-exempt under IRC Sec. 911, 931, or 933.
How to Claim These Credits. To claim either the American Opportunity credit or the Lifetime Learning credit, the client must complete Form 8863 (Education Credits) and then transfer the credit amounts from that form to the applicable lines on Form 1040.
Plan D: Take Advantage of Above-the-Line Deduction for Tuition and Fees
The American Opportunity and Lifetime Learning tax credits are not always available for adult education expenses. For example, your client might not meet the eligibility rules for the American Opportunity credit, and your client’s income might be too high to claim the Lifetime Learning credit. Do not give up hope. There is another break that might work for your client.
IRC Section 222 allows you to claim a limited above-the-line deduction for eligible tuition and fees. Depending on your income, the allowable write-off is the amount of qualified expenses subject to a cap of either $4,000 or $2,000.
Key Point: The Section 222 deduction expired at the end of 2017 and was then resurrected for 2018-2020 by the 2019 tax extenders legislation covered in Chapter 2.
Eligibility Rules. You cannot claim the Section 222 deduction for tuition and fees if you claim either the American Opportunity credit or the Lifetime Learning credit for the same student’s expenses for the same year. No double dipping! However, your client is allowed to claim the Section 222 deduction for his or her own expenses while claiming a credit for expenses incurred for his or her spouse and/or dependent child.
You are completely ineligible for the deduction if you are married and use married filing separate status. Also, IRS Publication 970 (Tax Benefits for Education) says you must already have a high school diploma or GED in order to claim the deduction.
Eligible expenses include tuition, mandatory enrollment fees, and course materials including books and supplies. However, the IRS says you can only deduct course materials if you are required to purchase them directly from the school. And you cannot deduct optional fees for things like student activities and insurance. Room and board costs are off limits too.
The expenses must be to attend an eligible institution. Virtually all accredited public, nonprofit, and for-profit postsecondary schools pass this test, as well as some vocational schools. The two main criteria are that the school must offer programs that lead to an associates degree, bachelors degree, or some other recognized credential; and the school must qualify to participate in federal student aid programs. An eligible school will have a Federal School Code, which you should be able to verify online at www.fafsa.gov.
Although you can only claim the Section 222 deduction for expenses to attend an institution that offers some sort of postsecondary degree or credential, you do not actually have to pursue a degree or credential to claim the deduction. For example, you can claim it for career-related courses and professional certification courses offered by a university, community college, or any other eligible institution.
Key Point: Your client can claim a 2020 deduction for eligible expenses that are paid in 2021 for: (1) courses in academic periods that begin in 2020, and (2) courses in academic periods that begin in January through March of 2021. Therefore, prepaying some expenses that are due early in 2021 could lower the client’s 2020 tax bill. The allowable deduction is calculated by filling out Form 8917 (Tuition and Fees Deduction).
Deduction Limits and Income Cut-Off Rule. If you are unmarried with modified adjusted gross income (MAGI) of $65,000 or less, the Section 222 deduction equals the lesser of: (1) $4,000, or (2) 100% of eligible expenses. Ditto for a married joint-filing couple with MAGI of $130,000 or less (for a married couple with income in this range, $4,000 is the maximum possible deduction even when both spouses have eligible expenses).
If you are unmarried with MAGI between $65,001 and $80,000, the maximum deduction is reduced to the lesser of: (1) $2,000, or (2) 100% of eligible expenses. Ditto for a married joint-filing couple with MAGI between $130,001 and $160,000 (for a married couple with income in this range, $2,000 is the maximum possible deduction even when both spouses have eligible expenses).
If MAGI exceeds the $80,000 or $160,000 ceiling (whichever applies), the client gets no deduction at all.
These income ceilings are fixed by statute. They are not adjusted for inflation.
MAGI means AGI increased by any income from outside the U.S. that is tax-exempt under IRC Sec. 911, 931, or 933. These adjustments will not apply to most individuals.
What If You Could Claim Either the Deduction or a Credit?
As mentioned earlier, you cannot claim both the Section 222 deduction and the American Opportunity credit or the Lifetime Learning Credit for expenses paid for the same student for the same year. You must pick either Door No. 1 (credit) or Door No. 2 (deduction).
If you the qualify for the rather generous American Opportunity credit, it will deliver more tax savings than the Section 222 deduction. Claim the credit in this case.
In the more common scenario where the client qualifies for the Lifetime Learning credit but not the American Opportunity credit, it can sometimes be a close call in figuring whether the Lifetime Learning credit is more valuable than the Section 222 deduction, or vice versa. The tradeoff gets complicated because it depends on the amount of eligible expenses, the client’s marginal tax rate, and whether the credit phase-out rule applies. The only sure way to find out which break is best is to fill out Form 8863 (Education Tax Credits) to calculate the Lifetime Learning credit and Form 8917 (Tuition and Fees Deduction) to calculate the Section 222 deduction. Then complete the rest of the return to see which break lowers the client’s tax bill the most.
Plan E: Deduct Work-Related Education Costs as Self-Employed Business Expenses (Often Best Plan of All When Available)
Work-related expenses for self-employed individuals can be deducted as business expenses on Form 1040. [See IRC Sec. 162(a).]
Key Point: For purposes of this analysis we will create our own term of art here and call work-related expenses that can be deducted as business expenses qualified education expenses. We will carefully define that term a bit later.
When a self-employed individual pays qualified education expenses, they can be written off as business expenses on Schedule C, E, or F (whichever form is appropriate).
Depending on the individual’s marginal federal and state income tax rates and her marginal self-employment (SE) tax rate, claiming Schedule C, E, or F deductions may be far more beneficial than claiming the Lifetime Learning credit for the same expenses. As explained earlier, the Lifetime Learning credit only delivers a 20% tax benefit. In contrast, a Schedule C, E, or F deduction delivers: (1) a federal income tax benefit equal to the individual’s marginal federal rate, (2) a state income tax benefit equal to the marginal state rate, and (3) an SE tax benefit equal to the marginal SE tax rate. (For simplicity, we will ignore the impact of any federal income tax deduction for state income tax payments, and we will also ignore the federal income tax deduction for 50% of SE tax.)
In addition, the Lifetime Learning credit is phased out at relatively low-income levels, and eligible annual expenses are limited to $10,000. In contrast, Schedule C, E, and F qualified education expenses are usually fully deductible without any limitation.
Key Point: As explained later in this analysis, expenses to obtain an undergraduate degree do not meet the definition of qualified education expenses. Since the American Opportunity credit can only be claimed for undergraduate degree program expenses, the issue of claiming a Schedule C, E, or F qualified education expense deduction for those expenses instead of claiming the American Opportunity credit for them will not arise. In other words, deductible qualified education expenses and eligible expenses for the American Opportunity credit are mutually exclusive.
Example 2: Deducting self-employed education costs as business expense.
Alfredo operates his business as a single-member LLC that is treated as a sole proprietorship for tax purposes. His marginal federal income tax rate is 24%, his marginal state income tax rate is 7%, and his marginal SE tax rate is 15.3%. Claiming a Schedule C deduction for Fred’s qualified education expenses would deliver a 46.3% tax benefit. (For simplicity, we will ignore the impact of any federal income tax deduction for Alfredo’s state income tax payments, and we will also ignore the federal income tax deduction for a portion of Fred’s SE tax.) In Alfredo’s situation, claiming a Schedule C deduction for his qualified education expenses is obviously a much better deal than claiming a 20% Lifetime Learning credit for those expenses.
Qualified Education Expenses for Plan E. Only qualified education expenses can be deducted as self-employed business expenses on the client’s Schedule C, E, or F.
TCJA Effect. The qualified education expense rules summarized here have most often been applied to determine if employees could claim unreimbursed employee business expense deductions for their education costs. As explained earlier, however, the TCJA eliminated deductions for unreimbursed employee business expenses for 2018-2025. However, these rules can also be used to determine when self-employed individuals have qualified education expenses that they can deduct as business expenses.
Standards for Qualified Expenses (Qualification Rules). According to Reg. 1.162-S(a), qualified education expenses mean costs for training that meets one or both of the following standards.
Standard No. 1: The education is expressly required by the employer or required by applicable law or regulations in order for the individual to retain his current employment relationship, status, or compensation Level.
Standard No. 2: The education maintains or improves skills required in the individual’s current employment, profession, or business.
TCJA Effect. For 2018-2025, these standards are not relevant in the context of claiming deductions for unreimbursed employee business expenses for work-related education, because deductions for unreimbursed employee business expenses have been eliminated. However, these standards are relevant in determining when self-employed individuals have qualified education expenses that they can deduct as business expenses.
More information regarding TCJA.
Example 3: Education meets Standard No. 2
Beth is a self-employed software consultant. Her business is set up as a single-member LLC that is treated as a sole proprietorship for tax purposes. From time to time, Beth enrolls in college courses to stay up to speed on software developments and learn new applications.
The costs to attend these courses are qualified education expenses because Standard No. 2 is met (the education maintains or improves skills required in Beth’s current profession or business). The same would be true if Beth incurs expenses to pursue an advanced degree that maintains or improves skills needed in her current profession or business. For instance, costs to obtain a Masters Degree in computer science or software engineering or an MBA should count as qualified education expenses (more on MBA costs later). Beth can deduct her qualified education expenses on her Schedule C.
Disqualification Rules. Reg. 1.162-5(b) stipulates that qualified education expenses do not include:
Disqualification Rule No. 1: Outlays for schooling that is required to meet the pre-existing minimum educational requirements for the taxpayer’s employment, profession, or business.
Disqualification Rule No. 2: Costs for a program of study that trains the taxpayer for a new profession or business, including being an employee in such new profession or business.
Key Point: When education expenses fall into either of the preceding categories, they cannot be qualified education expenses. Therefore, they cannot be deducted even though the education may meet the aforementioned Standard No. 1 or Standard No. 2.
TCJA Effect. For 2018-2025, these disqualification rules are not relevant in the context of claiming deductions for unreimbursed employee business expenses for work-related education, because deductions for unreimbursed employee business expenses have been eliminated. However, these rules are relevant in determining when self-employed individuals have qualified education expenses that they can deduct as business expenses.
According to a Tax Court decision, costs for education that prepares the taxpayer for a new profession or business cannot be qualified education expenses, even when the taxpayer does not intend to enter the new field. (See Judith Meredith, TC Memo 1993-250.)
In another case, a practicing accountant was not allowed to deduct expenses to obtain a law degree. Although the education undoubtedly improved skills used in his current line of work as an accountant, the expenses were not qualified education expenses because they also trained him for a new profession.
Even the costs to enroll in two tax courses (taken as part of the law degree program) were disallowed. In fact, the taxpayer had no intention of actually practicing law. Nevertheless, since the education trained him to be a lawyer, the costs were not qualified education expenses. [See Patrick O’Donnell, 62 TC 781 (1974), affirmed in unpublished opinion 519 F.2d 1406 (7th Cir. 1975).]
In another case, the IRS allowed a practicing attorney to deduct the costs of obtaining a masters degree in tax law. (See PLR 9112003.) The IRS concluded that the education improved skills required in the taxpayer’s current business of being a lawyer (thereby satisfying Standard No. 2) without training him for a new profession or business. Therefore, the costs met the definition of qualified education expenses and could be deducted.
Taxpayer Must Be Working (More or Less). Qualified education expenses can only be incurred while an individual is currently employed or otherwise engaged in a profession or business. However, temporary leaves can be taken to pursue full-time qualified education efforts as long as the individual ultimately returns to the same job (or a similar job) or the same trade or business.
Rev. Rul. 68-591 defines a temporary leave as a suspension of work for one year or less. However, The Tax Court does not display any loyalty to this arbitrary one-year guideline. In one decision, the Tax Court considered the situation of a school principal who took three years off to pursue a full-time doctoral program. The Tax Court deemed the three-year hiatus to be a temporary absence. Therefore, the taxpayer’s expenses were deemed to be qualified education expenses. (See Robert Picknally, TC Memo 1977-321.)
What about Undergraduate Degree Expenses? The IRS says an undergraduate degree automatically prepares you for a new profession or business, so costs to obtain a BA or BS are not qualified education expenses, and you cannot deduct them as self-employed business expenses. Unfortunately, the Tax Court has repeatedly agreed with the IRS on this issue. (See Theresa Malek, TC Memo 1985-428; Judith Meredith, TC Memo 1993-250; and Edward M. Fields, TC Summary Opinion 2001-35.)
Key Point: We hate to admit it, but costs to obtain an undergraduate degree evidently do not make the cut for deductible qualified education expenses. However, other tax breaks explained earlier in this analysis will often be available for undergraduate degree expenses (see Plans A, B, C, and D).
What about MBA Expenses? The IRS has historically argued that an MBA degree automatically trains an individual for a new profession or business. So, according to the government, MBA costs can never be deductible qualified education expenses.
TCJA Effect. The court decisions mentioned below all dealt with MBA costs that the taxpayers hoped to characterize as unreimbursed employee business expenses. As explained earlier, the TCJA eliminated deductions for unreimbursed employee business expenses for 2018-2025. However, the decisions can still provide useful guidance to self-employed individuals who are enrolled in MBA programs.
Pro-Taxpayer Court Decisions on MBA Expenses. Unlike the IRS, the Tax Court believes the question of whether MBA costs can be deducted should be answered on a case-by-case basis. In a nutshell, the Tax Court says deductible qualified education expense treatment is allowed if the MBA training maintains or improves skills used in the taxpayer’s current job, profession, or business (thereby meeting Standard No. 2) without preparing the taxpayer for a new profession or business.
Key Point: MBA costs will not be qualified education expenses if the education: (1) occurs before the taxpayer’s employment or shortly thereafter in order to meet pre-existing minimum educational requirements for her current job, profession, or business, or (2) trains the taxpayer for a new profession or business. Determining whether these two disqualifying factors exist (or not) should be based on the specific facts and circumstances that surround the taxpayer’s situation.
In one well-reasoned decision, the Tax Court concluded that obtaining an MBA degree may have accelerated the taxpayer’s career path, but it did not change the basic nature of his duties or prepare him for a new profession. (See Daniel R. Allemeler, Jr., TC Memo 2005-207.) In that decision, the Tax Court also served up a reminder that it had also allowed deductions for MBA degree costs in two earlier decisions where the education was deemed to improve skills used in the taxpayers’ current job, profession, or business rather than prepare them for a new profession or business. (See Robert C. Beatty, TC Memo 1980-196 and Frank S. Blair, Ill, TC Memo 1980-488.) Not surprisingly, a 2009 Tax Court Summary Opinion reached the same conclusion. (See Lori Singleton-Clarke, TC Summary Opinion 2009-182.)
