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April 27, 2014, 7:16 a.m. EDT
A tax break for getting an M.B.A.?
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By Bill Bischoff
As is often the case with tax questions, the answer is: it depends on your specific situation. Here’s what you need to know to figure out the answer for you.
Business deductions for education expenses
If you incur education costs to maintain or improve skills used in your current job or self-employed business, the general rule says you can deduct the costs as a business expense.
The IRS says an undergraduate college degree automatically prepares you for a new profession or business, which means you cannot write off the expenses as a business deduction. Unfortunately, the Tax Court has repeatedly agreed with the IRS on this issue. Rats! But don’t give up. You may qualify for other tax breaks.
Non-business credits: You may be eligible for either the American Opportunity tax credit (worth up to $2,500 a year for the first four years of college undergraduate work) or the Lifetime Learning credit (worth up to $2,000 a year for as many years as it takes to finish).
To claim the more-lucrative American Opportunity credit, you must carry at least half of a full-time course load for at least one academic period that starts during the year in question. If you are unmarried, the credit is phased between modified adjusted gross income (MAGI) of $80,000 and $90,000. For married joint-filers, the phase-out range is $160,000-$180,000.
There’s no course-load requirement for the Lifetime Learning credit, but a much stricter income phase-out rule applies, and you must spend at least $10,000 on qualified expenses during the year to claim the maximum $2,000 credit. If you are unmarried, the credit is phased out for 2014 between MAGI of $54,000 and $64,000. For married joint-filers, the 2014 phase-out range is $108,000-$128,000. (For 2013, the phase-out ranges were $53,000-$63,000 and $107,000-$127,000, respectively.)
Non-business deduction: Finally, you may be eligible to claim a non-business deduction for up to $2,000 or $4,000 of annual undergraduate college tuition and related fees on Page 1 of Form 1040. You don’t have to itemize to benefit. However, you cannot take the deduction if you claim either the American Opportunity credit or the Lifetime Learning credit for the year in question. No double dipping! Also, the IRS says you must already have a high school diploma or GED to take the deduction.
The larger $4,000 deduction is available if your modified adjusted gross income (MAGI) is $65,000 or less or $130,000 or less if you are a married joint-filer. The smaller $2,000 deduction is available if you are unmarried with MAGI between $65,001 and $80,000 or married with MAGI between $130,001 and $160,000. If your MAGI exceeds the $80,000 or $160,000 ceiling (whichever applies), you get no deduction.
Note: This deduction expired at the end of 2013, but I expect our beloved Congress to renew it for the 2014 tax year. Stay tuned to this column for updates.
Business write-offs may be allowed for M.B.A. costs and other breaks may be available too
The IRS has always argued that an M.B.A. degree automatically trains you for a new profession. So according to the tax collector, you can never deduct M.B.A. costs as unreimbursed employee business expenses or as self-employed business expenses. Thankfully, the Tax Court does not have the same bad attitude. It says business deductions are allowed if the M.B.A. training maintains or improves skills used in your current job, profession, or business. For example, if you are a marketing professional, I think you can clearly deduct M.B.A. costs under this standard.
However, business deductions cannot be claimed if the M.B.A. courses are taken before or shortly after you are hired in order to meet pre-existing minimum educational requirements for your job. Ditto if the M.B.A. trains you for a new profession. For example, if you are a self-employed tattoo artist who is pursuing an M.B.A. at night to become a marketing professional, you cannot write off the costs as a business expense because the M.B.A. trains you for a new profession.
Non-business credit: M.B.A. costs are eligible for the non-business Lifetime Learning tax credit, which can be worth up to $2,000 a year under the rules explained earlier.
Non-business deduction: You may be eligible to claim the non-business deduction for up to $2,000 or $4,000 of M.B.A. tuition and related fees on Page 1 of Form 1040 under the rules explained earlier.
What about law school? The IRS takes the position that a law degree (JD) automatically trains you for a new profession, and the courts agree — even if you have no intention of actually working as a lawyer. So you can never deduct law school costs as unreimbursed employee business expenses or as self-employed business expenses. However, the expenses can potentially qualify for the non-business Lifetime Learning credit or the non-business deduction for tuition and related fees under the rules explained earlier. Costs to obtain an LLM (Masters in Law) should fall under the same rules as M.B.A. costs, because an LLM does not allow you to actually practice law.
What if the same expenses qualify for several breaks?
One of the problems with our existing array of education tax breaks is they often overlap. For instance, you might be able to claim the non-business Lifetime Learning credit or the non-business deduction for the same undergraduate tuition and fees. And you might be able to claim a business write-off or the non-business deduction for the same M.B.A. tuition and fees. The only sure way to tell which overlapping break will save you the most money is by filling out your return one way and then the other. Use Form 8863 (Education Tax Credits) to calculate the American Opportunity or Lifetime Learning credit. Use Form 8917 (Tuition and Fees Deduction) to calculate the non-business deduction.
A tax break for getting an M.B.A.? - Tax Guy - MarketWatch
April 27, 2014, 7:16 a.m. EDT
A tax break for getting an M.B.A.?
Watchlist Relevance
LEARN MORE
By Bill Bischoff
As is often the case with tax questions, the answer is: it depends on your specific situation. Here’s what you need to know to figure out the answer for you.
Business deductions for education expenses
If you incur education costs to maintain or improve skills used in your current job or self-employed business, the general rule says you can deduct the costs as a business expense.
- If you are an employee, the deduction is classified as a miscellaneous itemized deduction for unreimbursed employee business expenses and must be claimed on Form 2106 (Employee Business Expenses) and then on Schedule A (Itemized Deductions). When combined with other miscellaneous itemized deduction items (such as investment expenses and fees for tax advice), you can write off the education expenses to the extent your total miscellaneous itemized deductions exceed 2% of your AGI (adjusted gross income). AGI is the number at the bottom of page 1 of Form 1040. It includes all income items and certain deductions such as the ones for alimony paid and moving expenses.
- If you are self-employed, deduct your business-related educations costs on Schedule C (for sole proprietors), Schedule E (for partners, LLC members, and rental activities), or Schedule F (for farmers and ranchers).
The IRS says an undergraduate college degree automatically prepares you for a new profession or business, which means you cannot write off the expenses as a business deduction. Unfortunately, the Tax Court has repeatedly agreed with the IRS on this issue. Rats! But don’t give up. You may qualify for other tax breaks.
Non-business credits: You may be eligible for either the American Opportunity tax credit (worth up to $2,500 a year for the first four years of college undergraduate work) or the Lifetime Learning credit (worth up to $2,000 a year for as many years as it takes to finish).
To claim the more-lucrative American Opportunity credit, you must carry at least half of a full-time course load for at least one academic period that starts during the year in question. If you are unmarried, the credit is phased between modified adjusted gross income (MAGI) of $80,000 and $90,000. For married joint-filers, the phase-out range is $160,000-$180,000.
There’s no course-load requirement for the Lifetime Learning credit, but a much stricter income phase-out rule applies, and you must spend at least $10,000 on qualified expenses during the year to claim the maximum $2,000 credit. If you are unmarried, the credit is phased out for 2014 between MAGI of $54,000 and $64,000. For married joint-filers, the 2014 phase-out range is $108,000-$128,000. (For 2013, the phase-out ranges were $53,000-$63,000 and $107,000-$127,000, respectively.)
Non-business deduction: Finally, you may be eligible to claim a non-business deduction for up to $2,000 or $4,000 of annual undergraduate college tuition and related fees on Page 1 of Form 1040. You don’t have to itemize to benefit. However, you cannot take the deduction if you claim either the American Opportunity credit or the Lifetime Learning credit for the year in question. No double dipping! Also, the IRS says you must already have a high school diploma or GED to take the deduction.
The larger $4,000 deduction is available if your modified adjusted gross income (MAGI) is $65,000 or less or $130,000 or less if you are a married joint-filer. The smaller $2,000 deduction is available if you are unmarried with MAGI between $65,001 and $80,000 or married with MAGI between $130,001 and $160,000. If your MAGI exceeds the $80,000 or $160,000 ceiling (whichever applies), you get no deduction.
Note: This deduction expired at the end of 2013, but I expect our beloved Congress to renew it for the 2014 tax year. Stay tuned to this column for updates.
Business write-offs may be allowed for M.B.A. costs and other breaks may be available too
The IRS has always argued that an M.B.A. degree automatically trains you for a new profession. So according to the tax collector, you can never deduct M.B.A. costs as unreimbursed employee business expenses or as self-employed business expenses. Thankfully, the Tax Court does not have the same bad attitude. It says business deductions are allowed if the M.B.A. training maintains or improves skills used in your current job, profession, or business. For example, if you are a marketing professional, I think you can clearly deduct M.B.A. costs under this standard.
However, business deductions cannot be claimed if the M.B.A. courses are taken before or shortly after you are hired in order to meet pre-existing minimum educational requirements for your job. Ditto if the M.B.A. trains you for a new profession. For example, if you are a self-employed tattoo artist who is pursuing an M.B.A. at night to become a marketing professional, you cannot write off the costs as a business expense because the M.B.A. trains you for a new profession.
Non-business credit: M.B.A. costs are eligible for the non-business Lifetime Learning tax credit, which can be worth up to $2,000 a year under the rules explained earlier.
Non-business deduction: You may be eligible to claim the non-business deduction for up to $2,000 or $4,000 of M.B.A. tuition and related fees on Page 1 of Form 1040 under the rules explained earlier.
What about law school? The IRS takes the position that a law degree (JD) automatically trains you for a new profession, and the courts agree — even if you have no intention of actually working as a lawyer. So you can never deduct law school costs as unreimbursed employee business expenses or as self-employed business expenses. However, the expenses can potentially qualify for the non-business Lifetime Learning credit or the non-business deduction for tuition and related fees under the rules explained earlier. Costs to obtain an LLM (Masters in Law) should fall under the same rules as M.B.A. costs, because an LLM does not allow you to actually practice law.
What if the same expenses qualify for several breaks?
One of the problems with our existing array of education tax breaks is they often overlap. For instance, you might be able to claim the non-business Lifetime Learning credit or the non-business deduction for the same undergraduate tuition and fees. And you might be able to claim a business write-off or the non-business deduction for the same M.B.A. tuition and fees. The only sure way to tell which overlapping break will save you the most money is by filling out your return one way and then the other. Use Form 8863 (Education Tax Credits) to calculate the American Opportunity or Lifetime Learning credit. Use Form 8917 (Tuition and Fees Deduction) to calculate the non-business deduction.
A tax break for getting an M.B.A.? - Tax Guy - MarketWatch
