Tax Changes for MBA Students: Years 2017 and 2018

Attention MBA students.

Did you know that 2017 might be the last year you can deduct your graduate school tuition in full?

Unfortunately, the recently enacted Tax Cuts and Jobs Act of 2017 eliminated the itemized deduction for work-related education along with a whole range of other miscellaneous deductions. This has important implications for MBA students and students in other professional degree programs.

First, the bad news.

Starting with tax year 2018, MBA students will no longer be able to deduct the cost of their graduate school tuition and course materials as an itemized deduction for work-related education. The Tax Cuts and Jobs Act temporarily eliminates this deduction, along with other miscellaneous itemized deductions, for the years 2018 through 2025. Work-related education won’t become deductible again until the year 2026, and maybe never again if the new law is extended by a future act of Congress.

Now, the good news.

Students are still able to deduct MBA tuition on their 2017 tax return, if they qualify for the deduction. But 2017 will be the last year for the work-related education deduction.

For 2017, MBA students will qualify to claim an itemized deduction for their tuition and course materials if they meet the four criteria listed below:

  1. The student was established in a business profession prior to starting their MBA program.
  2. The MBA courses enhanced the skills the student gained in the job prior to their MBA.
  3. The student continues to use their enhanced skills after completing the MBA.
  4. The MBA cannot qualify the student for a new profession.

Tuition expenses that result in a net operating loss in 2017 (because total tuition expenses exceed total income), that loss can be carried over into 2018, even though work-related education is no longer deductible. That means students can still get the full benefit of tuition expenses paid in past years.

It is also still possible to amend past tax years, going back up to at most three tax years, if you did not originally take the deduction.

Learn more about writing off the cost of your MBA on your 2017 tax return.

What tax benefits are available for 2018?

For tax year 2018, there are two key tax benefits available for MBA students, but only those that file a resident tax return. (These benefits are not available to international students who file a non-resident tax return.)

Students could deduct up to $4,000 of their tuition as an above-the-line deduction. To qualify for the deduction, the student needs to have income for the year of $80,000 or less (or $160,000 for a married couple). (The tuition and fees deduction was retroactively extended for tax year 2017 as part of the H.R.1892, the Bipartisan Budget Act, which was signed into law on February 9, 2018.)

Alternatively, students could take a tax credit for 20% of their tuition costs. However, this Lifetime Learning tax credit maxes out at $2,000. To qualify, a student needs to have income of $66,000 or less (or $132,000 for a married couple).

While MBA students are fortunate these tax benefits survived the tax reform changes, the tax savings are certainly less advantageous compared to the tax savings from deducting work-related education in full.

A surprise for self-employed students.

While the new tax law temporarily eliminated the work-related education deduction for employees, they left the deduction in place for self-employed people.

That means, MBA students who were already established in their career as an independent contractor or freelance professional can deduct the cost of their MBA tuition in full against their self-employment income.

Curious about how these changes will impact your tax situation?

 

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3 Comments

  1. I am told that the deduction for self-employment can be realized if the student is in rental real estate professionally, in addition to being a W-2 employee. Also, I’m told that if the students spouse I am told that the deduction for self-employment can be realized if the student is in rental real estate professionally, in addition to being a W-2 employee. Also, I’m told that if the students wife is employed in rental real estate, then there is additional benefit in terms of qualifying for the deduction. Can you please comment on these details?

    1. Hi Jack – It’s certainly possible! It’s important to review your specific situation though to know if you qualify. The key is that the MBA education must be related to the self-employment work. Being a real estate professional could certainly qualify. There are no black and white rules, but applying tuition expenses against 1099 income is still possible under the new tax law. Feel free to sign up for an account with Visor or reach out to your Visor tax pro to discuss your specific situation!

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