Deducting Education Expenses

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Deducting Education Expenses

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By Roy Lewis

In the Taxpayer Relief Act of 1997, education was king. There were many provisions, most taking effect in 1998, which allowed for expanded deductions and credits for qualified education expenses. We have linked a number of articles dealing with various education credits and deductions, but this article covers the deduction for education expenses.

The rules work like this: A deduction is available if the education maintains or improves the skills related to your trade or business. Educational costs are also deductible if the education is required (by law or by your employer) to keep your current position or job.

On the other hand, educational costs are not deductible if the education is required to get into a particular field (as opposed to staying in the field), or qualifies you for a new trade or business.

For example, a lawyer can't deduct basic law school costs, because they are required to enter the legal field. Once she becomes a lawyer, however, any courses she takes to keep current or learn new techniques are deductible.

The expenses of becoming a specialist within a field may or may not be deductible. Let's take a doctor. If the goal all along was to become a psychiatrist and the individual went straight through medical school, internship, and then into a psychiatric residency, all of the costs would be treated as being required to enter the field and would not be deductible.

But, an internist who has already been practicing medicine for a period of time can deduct the costs of a psychiatric program he enters as improving skills within his profession. See how the line could be a little bit hazy? And, it can get even more confusing.

Many taxpayers take law-related courses for help in their professions or businesses. Seminars and/or courses that you take within your profession on law-related issues are generally deductible since they improve your current skills. Conversely, law school courses leading to a degree (even if taken for the same "improvement" purpose) are generally not deductible because they lead to qualifying you for a new profession.

You can see how the "maintain and improve" standard might not be as cut-and-dried as you might hope. In many cases, some tax research could be needed to see if your unique situation would be deductible or not. And, many times, if the situation is truly unique, or the money involved is substantial, the assistance of a qualified tax pro could be in your best interest.

But, let's say that you meet the "maintain and improve" standard and determine that your education costs are deductible. You not only get the benefit of the direct education expenses, but you can also include the transportation costs involved in getting from work to the course location or vice versa. Transportation between home and the course location is deductible for education undertaken on a temporary or irregular basis. If the transportation is in the nature of a commute, it's not deductible. If you're away from home for deductible education, you can include the costs of travel, meals (at 50%), and lodging, as well. But, and this is a very big "but," travel as the educational vehicle itself (e.g., a French teacher's trip to France) is not deductible.

In the case of an employee, education expenses that are deductible under the above tests can be claimed as an itemized deduction, but only to the extent the expenses, along with other miscellaneous itemized deductions, exceed 2% of the taxpayer's adjusted gross income (AGI).

And, in the case of taxpayers with high AGIs, miscellaneous itemized deductions are subject to a further overall limit. So, while your education expenses might be deductible, because of how they must be reported on your tax return, you could find that you receive little or no actual tax benefit for those expenses. Before you undertake any deductible education, you might want to check your tax status to determine what positive tax impact these deductions will actually have.

What happens if you find that your education expenses are not deductible? Or you find that, while the expenses are deductible, your tax issues are such that you receive very little (or no) tax benefit. Do you just hang your head, pay your taxes, and move on? Not necessarily. That's where many of the education provisions in the 1997 Tax Act kick in.

Did you know that you might be able to claim a deduction of up to $2,000 on your 2000 taxes and up to $2,500 in 2001 and after, for interest that you paid for qualified student loans -- without even having to itemize your deductions?

Did you know that you might qualify for a HOPE tax credit of up to $1,500 per year, for the first two years of undergraduate education at an eligible educational institution?

Did you know that you might qualify for a Lifetime Learning Credit of up to $1,000 per year ($2,000 in tax year 2003 and later) for any post-high-school education at an eligible educational institution?

Did you know that your employer might be able to pay for some of your education-related expenses and those payments would not be deemed taxable income to you?

All of these provisions are interrelated in some form or another, so it will be important to identify the combination of deductions and credits that will allow you the greatest tax benefit.

If you don't itemize your deductions, you will generally want to claim the HOPE/Lifetime Learning credits. Many of you will have to decide whether to take an itemized deduction for your education expenses or claim the HOPE/Lifetime Learning credits for those expenses. If you are not subject to the overall limit on itemized deductions, you might find that an itemized deduction for education expenses is more advantageous than the Lifetime Learning credit.

Why? Because itemized deductions reduce your taxable income, and therefore save taxes at your top tax rate. On the other hand, if the education expenses are not related to your current trade or business but are incurred to acquire new job skills, the education expenses would not be allowable as an itemized deduction. Those same expenses, however, might still qualify for the HOPE/Lifetime Learning credits.

Confusing? It sure can be. If you want to read more about deductible education expenses, check out IRS Publication 508 and our other articles on the various credits, deductions, education IRAs, and how they all interrelate.

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