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What You Need to Know About Deducting Continuing Education

What You Need to Know About Deducting Continuing Education
Ines Zemelman, EA
17 March 2018

When we hear the word “education”, we often think of children. But, education is more broad than that, and learning should never end, no matter your age.  Regardless of whether or not you enjoy learning, an education is not cheap these days, and if your education can be paid for by someone else - you’re in luck. Thankfully, even Uncle Sam will help foot some of the bill.

  • American Opportunity Credit -  Parents under a certain income limit can claim the American Opportunity tax credit up to $2,500 for each child. This credit does not apply to adults who have already obtained a degree, or who only attend school part time.
  • The Lifetime Learning credit -  up to a $2,000 maximum, is available for adults in many cases. But, like the American Opportunity tax credit, it phases out for higher earners (currently over $56,000 for singles and $112,000 if filing jointly).
  • Tuition and fees deduction allowed taxpayers to reduce their taxable income by up to $4,000. Under the new tax law, the tuition and fees deduction is no longer available. The tuition and fees deduction was actually an extender that expired at the end of 2016.

Luckily, there is another option. It is possible to deduct expenses for your education as a career expense. Sole proprietors can consider the expense to be a business cost and it can be written off using Schedule C. 

Under the recent tax bill changes, business deduction for work-related education eliminated for employees. The new tax law eliminates the ability for employees to deduct work-related expenses as an itemized deduction on Schedule A.

No changes made to employer-provided education assistance benefits. The employer-provided education assistance exclusion allows employers to offer up to $5,250 per year in educational assistance as a tax-free benefit.

Who foots the bill matters

You must have paid for it. If the course was paid for by your employer, you can’t deduct it. Tax laws allow employers to pay a maximum of $5,250 per year, per employee for employee education without considering it taxable income for the employee (assuming this benefit is available to all employees). It is not surprising, then, that the employee cannot also deduct this expense.

Deductibility can be determined using two tests

Educational expenses can be deducted if they meet either of the two tests below.

  • Maintains/improves skills required for business - The first test is that the expense improves or maintains skills required for your current business/ trade.
    • Examples are a salesperson taking a negotiation seminar, a bookkeeper taking a finance class, or an HR consultant attending a course on employee benefits or employment law.
       
  • Continuing education - The second test is that the expense is necessary to meet a requirement of a regulation or law, an employer requirement, or is required to maintain employment, pay rate, or job status. 
    • Examples are classes necessary to maintain license to practice law, medical practice, or driver training for truck drivers.

Current or New Career? Current careers only.

If the educational expense trains you to perform a new job, it is not deductible. As an example, a dancer who is taking classes to obtain her real estate license cannot deduct that expense. But, both a hairdresser and a doctor could take a meditation in business seminar and deduct it.

In general, expenses to obtain a college degree are usually not deductible since most degrees qualify a person for new careers.

Specific circumstances matter

Although qualification for new professions is an objective determination, there are still some subjective components. A classic example is an MBA. Although an MBA does not qualify a person for a different career like a law degree does, the deductibility of an MBA depends on the specific situation.

Hard, but not impossible. A recent example of successfully making your case to the IRS is the situation of a nurse who worked in various nursing and administrative roles for over two decades. She made the decision to get an MBA to improve her skills in her administrative role. Although she was currently working as a manager, the IRS did not allow her deduction. She appealed, and a tax court ruled in her favor. Although she did get a different job after obtaining the MBA, she successfully argued that she pursued the MBA only to improve her current skills, and would have qualified for the new position even without having the MBA.

In general, it is hard to deduct MBA expenses

Although the example above worked in the taxpayer’s favor, don’t plan on being able to deduct an MBA. There are many other cases with different results, usually resting on the “new career” argument.

Ines Zemelman, EA
founder of Taxes for Expats