The Internal Revenue Code, (IRC), provides for many tax benefits attributable to education including graduate education. Specifically, IRC 25A provides for the Hope and Lifetime Learning Credits. The Lifetime Learning Credit can be used to reduce one’s taxable income in years that they have incurred qualified graduate educational expenses. Additionally, IRC 222 may provide a $4,000 deduction for married taxpayers and a $2,000 deduction for single taxpayers when they incur qualified graduate educational expenses. Graduate students also have the tax savings benefit of deducting qualified student loan interest.
There are times when graduate educational expenses may be considered trade or business expenses under IRC 162. In the situations where this is the case, the expense creates a powerful tax deduction. The key to qualify for a deduction under IRC 162 is that the education was incurred to maintain or improve skills required by a taxpayer in his or her employment, and / or the education meets the express requirements of the individual’s employer or of applicable law. Under either of these qualifiers the taxpayer has to be carrying on a trade or business, meaning that they would have had to establish themselves in some type of career, profession or field.
In the past, depending upon their facts and circumstances, some graduate students arguably had tax deductions under IRC 162. In fact, there was case law that lent itself to the support of this position in favor of the taxpayer. The most definite case in this area was Sherman vs. Commission, (TC Memo 1977-301). In the last two years, the Internal Revenue Service has successfully challenged taxpayers in Tax Court and has landed two opinions that have made it very difficult to deduct MBA expenses. The two cases are McEuen v. Commissioner and Yuanqiang Zhang v. Commissioner. With these two cases at its side, the Internal Revenue Service, (IRS), has been diligent in attempting to deny taxpayers the ability to deduct graduate educational expenses attributable to an MBA. Typically, an MBA with a sound argument, (post McEuen), would be one that is matriculating on a part time basis, in an executive program, is on temporary leave from their employer, or is being sponsored by their employer. Even under these circumstances, the IRS could still challenge a taxpayer making a claim for an MBA educational expense deduction and could succeed in denying the deduction.
Not all graduate students are pursuing a Masters of Business! The two Tax Court cases that the IRS was successful in defeating Grad Students were related to Masters of Business Degrees. There are still opportunities for other professionals that have established themselves in specific businesses, trades or professions to deduct graduate education within their disciplines. Good examples are educators, social workers, attorneys, librarians, and many other established professionals that pursue graduate education within their chosen field.
Business Financial Consultants, Inc. has been one of the leading CPA firms nationwide specializing in assisting clients with maximizing their educational expenses for tax purposes and has done so for over fifteen years.
