One of the perks of preparing for an MBA is the ability to write off tuition, transportation and other charges as business expenses on one’s tax return. But in practice claiming tax deductions for students isn’t always easy, as they have to adhere to a specific set of criteria in order to qualify for such breaks. A decision earlier this month by the U.S. Tax Court, a specialized tribunal that handles such cases, may open the door for more professionals to offset the cost of further education with tax deductions on their IRS bill.

Tax Deductions for Students

As a rule students can deduct education costs as an “unreimbursed business expense” if doing so maintains or improves skills that are necessary to their job. This applies to those employed by another entity (who deduct the expenses on Schedule A) and those who are self-employed (who use Schedule C). Tuition and related expenses are not allowable as a write-off if they merely fulfill the minimum requirements of a job or qualify the student for a new type of employment. 

The recent ruling in favor of one-time graduate business student Alex Kopaigora is notable, in part, because he was unemployed for a portion of the year in which he deducted the education costs. According to court documents, Kopaigora was working as a controller for a Marriott hotel in Los Angeles in 2011 when he enrolled in an executive MBA program at Brigham Young University. However, his employment ended in April of that year, even as he continued to take courses.

The judge ruled that despite his lack of employment Kopaigora was eligible to deduct $18,879 in education costs (which included commuting expenses between L.A. and Salt Lake City). According to the court’s opinion, the individual’s unemployment status “did not prevent him from continuing his trade or business as a finance and accounting business manager,” noting that he continued to look for other positions after losing his job. Crucially, the degree was not a prerequisite for the job the petitioner ultimately landed upon graduation. 

While the court’s decision cannot be used as legal precedent for other cases, experts suggest that it could nonetheless affect judges who face similar disputes. The opinion may help open the door for certain unemployed students to write off their tuition and related expenses. Another important aspect of the ruling is that it validates the ability to write off costs associated with executive MBA programs, which are tailored to more experienced business professionals. 

Other Tax Breaks

Historically, the IRS has been fairly aggressive in its enforcement of whether MBA students are entitled to deductions. But if you don’t qualify to write off education-related costs as business expenses, you’re not entirely out of luck. You may be able to shrink your tax liability through other means, including:

  • Lifetime Learning Credit Students can receive a credit of up to $2,000 per tax year if they paid qualified education expenses for themselves or someone else. The credit is available for any courses that help one “acquire or improve” job skills. 
  • Tuition and Fees Deduction  Students who pay for higher education tuition and fees can receive a deduction of up to $4,000 by filling out Form 8917. What’s nice is that you can claim the deduction even if you don’t itemize your expenses. However, the deduction is only offered to those who don’t claim the Lifetime Learning Credit you can’t use both.  
  • Student Loan Interest Deduction – This deduction allows you reduce your tax bill once you start repaying your student loans. This is an option if you have a qualifying loan and your modified adjusted gross income, or MAGI, is less than $80,000 ($160,000 for those filing a joint return). 

(For more, see Top Government Tax Breaks for College Graduates and Top Tax Refunds for Recent Grads.)

The Bottom Line

While it can’t be cited as precedent in future cases, the recent ruling by a tax court in favor of a temporarily unemployed MBA student is giving hope to others who want to write off their tuition despite losing a job. The court seems to be taking a more relaxed view of what constitutes being engaged in a particular trade.

 

 

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