With many top-ranked full-time MBA programs costing more than $50,000 in tuition per year, the ability to deduct b-school expenses come tax time offers some students a way to recoup costs.
Brandon Yahn, 32, who completed his MBA in 2012 at the University of California–Berkeley’s Haas School of Business, did exactly that, deducting his b-school tuition from his taxes.
“The interesting thing about this deduction is you can really deduct tuition for about three years unless you’re making an absurd amount of money before you go to business school,” says the West Virginia native, who now runs a California-based student loan information startup.
Under the IRS’s tuition and fee deduction, a student’s annual income can’t exceed $80,000 if filing as an individual on the return. That limit goes up to $160,000 if the taxpayer is married and filing jointly.
Yahn says most full-time b-school students who worked in business beforehand probably qualify since these students enter their programs after working for several months that year. “I didn’t hit the limit, so I was able to make the deduction.”
The UC–Berkeley grad took the deduction the following year, after starting b-school, since he earned money from his 12-week paid internship that summer; he made the deduction during his final year, too.
[See the 10 MBAs with the highest return for grads earning $100,000-plus.]
“You’re a student before starting your full-time job again. Even if you’re making $160,000, assuming you’re working half the year, it’s under $80,000 individually and you can deduct your third year,” he says.
For prospective or current b-school students, here are a couple options to consider when claiming money on your taxes.
— Claiming tuition as a deduction on your individual tax return: “To qualify, you have to pay for the tuition yourself, it can’t have been paid with tax-free scholarships or grants,” says Josh Zimmelman, owner of New York-based Westwood Tax & Consulting.
“Tuition and student activity fees are deductible,” Zimmelman says. “But housing and travel expenses are not.”
[Learn how to pay less in tax from a student loan deduction.]
With this deduction, a taxpayer can adjust taxable income up to $4,000. Tax experts say this can save around $1,000 for those at the 25 percent tax rate.
— Deducting tuition as an allowable business expense: Under this IRS tax code, the business deduction for work-related education allows an individual to take this deduction if the education is required either by an employer or “maintains or improves skills needed in your present work.”
Under the work-related education deduction, b-school expenses must be more than 2 percent of the taxpayer’s adjusted gross income.
“The IRS says you can deduct any education expense that’s related to your current job or field, as a business expense,” says Wendy Connick, owner of Connick Financial Solutions. “If you can justify your MBA as somehow related to your job, which should be possible for many business careers, you can swing this deduction.”
Peter Kuck, who competed his MBA last year from the Anderson School of Management at the University of California–Los Angeles, used this deduction since he continued to work during b-school.
“As an MBA student with an income source at the time, I utilized the unreimbursed business expense deduction to fully reduce my taxable income by the amount paid in tuition each year,” he says. “This deduction is available for individuals who are able to show that the MBA did not qualify them for an entirely new job, but rather augmented their ability to perform at their current job.”
Kuck, who also runs a California-based personal finance website called Thrift Gurus, says this deduction is the better strategy for non-career switchers.
[See how to calculate the return on investment for an MBA.]
“A lot of the times — especially with an executive MBA — you’re working to increase or maintain your skills for your present work, and that’s one of the qualifications for this deduction,” says Marguerite Weese, vice president and wealth planner at Wilmington Trust who is also a tax attorney. “It certainly fits in well.”
But Weese says students should make sure that they meet the IRS’s guidance on qualified work education — especially if they stop working at some point during school. “There is a rule about education if you stop working for a certain period of time.”
Travis Greaves, a tax partner at Greaves Wu, LLP in the District of Columbia, says part-time MBA students have a greater success with this deduction.
“Courts have found that full-time students were not carrying on a trade or business while in the program, and that an MBA may qualify a student for a new trade or business,” Greaves says. “With respect to part-time students, the key is proving that the student’s duties did not change after receiving the MBA.”
Trying to fund your education? Get tips and more in the U.S. News Paying for Graduate School center.
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How to Deduct MBA Tuition on Your Taxes originally appeared on usnews.com
