The Internal Revenue Code provides various tax credits, special deductions, saving incentives and tax breaks for education. This column will look at education expense deductions.
Business Deduction for Work-related Education Expenses
A deduction is available for education costs 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.
Educational costs are not deductible if the education is required to gain entry to a particular field or qualifies you for a new trade or business.
For example, a medical student can't deduct basic medical school costs. These costs are required to become a physician. Once she becomes a physician, 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. If the medical student's goal was to become a psychiatrist, and she went straight through medical school, an internship, and then a psychiatric residency; all of the costs would be treated as being required to enter the field and would not be deductible.
On the other hand, an internist who has been practicing medicine for a while can deduct the cost of psychiatric training as improving skills within his profession. There is lots of room for argument about these types of educational expenses, whether they maintain and improve skills and are deductible or whether the education is preparation for entry to a new field.
If the education expenses are deductible, in addition to the direct tuition and fees; you can also deduct transportation costs involved in getting back and forth from work to the course location. If the transportation is commuting expenses, it is not deductible. If you travel to attend the educational program, you can deduct the costs of travel, 50% of meal costs and lodging.
If you are an employee, any of these expenses that are deductible are claimed as itemized miscellaneous deductions if, and only if, combined with other miscellaneous itemized deductions they exceed 2% of your adjusted gross income.
If you are unemployed, not engaged in a business, expenses for education may not be deductible unless your absence from work is only temporary.
Tuition and Fees Deduction
If your education expenses are not deductible as business expenses or, if deductible, they give you no tax benefit because of the 2% floor; an alternative may be deducting them under the Tuition and Fees deduction. This deduction permits you to deduct the amount paid for qualified tuition and fees for yourself, your spouse, or a dependent up to $4,000 from taxable income.
The deduction phases out as income rises, and you are completely ineligible to take the deduction if you can be claimed as a dependent by another taxpayer, you are filing married filing separately, or your modified adjusted gross income is greater than $80,000 for single filers and $160,000 married filing joint filers. If your modified adjusted gross income is more than $65,000 ($130,000 on a joint return) but not more than $80,000 ($160,000 on a joint return), you can deduct up to $2,000 of qualified tuition and related expenses. If your modified adjusted gross income is less than $65,000 ($130,000 on a joint return) you can deduct up to $4,000.
Student activity fees and fees for books, supplies, and equipment are included in qualified tuition and related expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. You must reduce your qualified expenses by the amount of any tax-free education assistance you receive.
You cannot take the tuition and fees deduction for a student if you claim the or Lifetime Learning Credit for the same student in the same year.
The tuition and fees deduction is an "above the line" deduction and will reduce income even if you cannot itemize deductions. File Form 8917 Tuition and Fees Deduction along with your 1040.
Student Loan Interest Deduction
You can claim a deduction for the amount of interest you pay on a qualified student loan. The amount of the deduction is the lesser of the amount of interest you actually paid during the year or $2,500.
Like the tuition and fees deduction, the student loan interest deduction is an "above the line" deduction and will reduce income even if you cannot itemize deductions.
To be eligible you must 1) be legally obligated to pay the interest, 2) you are not filing married filing separately 3) your adjusted gross income is less than $75,000 if filing single or $150,000 if filing jointly, and 4) you and your spouse cannot be claimed as dependents on someone else's return.
