Educating the Masses to Help You Save On Taxes

Want to be the Master of Your Universe?

I recently wrote a series on the various tax deductions and credits available to help you better afford continuing education like the Lifetime Learning Credit, the American Opportunity Credit & Student Loan Interest Deductions. If you’ve been toying with the idea of going for your Masters, I’ve got some good news for you especially if you’re a higher earning taxpayer that is having your Lifetime Learning Credit and the Tuition Deduction phased out.

A recent court ruling (Singleton-Clarke. TC Summary Opinion 2009-182) in favor of allowing a taxpayer to deduct almost $15,000 of tuition she paid to get her MBA has opened the door for deductions in similar situations. This means you may now be able to deduct your education expenses for that Masters.

Granted it’s not a blank check, there are a few rules you need to go by in deciding if you are eligible. If either of  these rules applies to you, you can take the deduction:

Rule #1: You’re going back to school because the education is required by your employer or by law to keep your current job.

Rule #2: You’re going back to school to maintain or improve skills you need in your present work.

Keep in mind you can’t deduct your expenses (even if you meet the criteria of the rules above) if the education is required to meet preexisting minimum educational requirements of your current job or if it qualifies you for a new trade or business.

If you DO qualify, then you can deduct the education expenses as business expenses. If you’re an employee, unreimbursed business expenses are deductible as miscellaneous expenses on Schedule A (although the 2% of AGI floor applies). Self employed folks will deduct the expenses in full on Schedule C.

What you can deduct:

• Tuition, books, supplies, lab fees, etc.
• Some transportation and travel costs
• Other related expenses like the cost of producing term papers or school projects

What you can’t deduct:

• Personal or capital expenses like the cost of a new laptop
• Value of leave time you use to attend classes

By the way, if you’re a business owner and you pay for an employee’s education expenses under a qualified educational assistance plan, you can receive up to $5,250 of annual tax-free reimbursements. Not bad, eh?