Photo credit: Muhammad Rizwan / Unsplash.
IMPORTANT: The new tax law effective starting 2018 eliminated the tuition write-off, with limited exceptions for self-employed MBAs. The below article is still applicable, but only to amending past year tax returns within the statute of limitations (2015-2017). Updated 1/11/2019.
If you paid tuition in the past three years (2017, 2016, 2015), you might have an opportunity to get more money back from the IRS.
Many students overlook the deduction for work-related education. That deduction is available for students who already established in their careers, and went back to school to get a degree related to their profession. Students who already filed their tax returns might want to revise their taxes to claim additional refunds.
The Problem – Picking the Right Tax Deduction or Credit for the Tuition
There are four key tax breaks for college tuition expenses. Two are deductions, and two are tax credits. They are:
- The Tuition and Fees deduction
- The Work-Related Education deduction
- The American Opportunity tax credit, and
- The Lifetime Learning tax credit.
The problem is that sometimes a client will pick a deduction or a credit for which they qualify, but they did not realize they qualified for another deduction or credit that would yield bigger tax savings. That’s what happened to Joaquin.
(Joaquin is a fictional client. As a tax services company, Visor believes in protecting the confidentiality of our client’s tax information. Joaquin’s situation reflects a common pattern we see among recent graduates.)
Joaquin put himself through business school at the University of Chicago. He graduated in the Spring of 2017 with a Master’s of Business Administration. By day he worked as a financial analyst in the finance department of a mid-sized company. He would study at night and attend classes on the weekend.
Being good with numbers, Joaquin prepared his own tax returns. He had claimed the Lifetime Learning tax credit for the years 2015 and 2016, but he did not claim any tax breaks for 2017, his final semester in the MBA program.
Would Joaquin have been better off had he claimed the deduction for work-related education instead? That’s the key question in our mind. The deduction for work-related education has stricter eligibility criteria compared to the other tax breaks, but it also can yield potentially greater tax savings.
The Solution – Amending Previous Tax Returns to Claim the Best Tax Break for Tuition
If you are eligible for the work-related education deduction, and you claimed any other education tax break on your tax return in the previous three years, then you might want to amend your tax return to claim the work-related education deduction. By doing so, you could receive additional refunds from the IRS and your state tax agency.
Before We Get to the Solution, We Have to Analyze the Situation
Not everyone is eligible for the work-related education deduction. So we need to analyze the client’s situation using the various tax rules.
In Joaquin’s situation, we asked him to send us his last three years of tax returns and documentation of his tuition expenses.
We analyzed his previous tax returns carefully. Then we got on the phone and had an in-depth conversation. During our call, we dug into the eligibility criteria for the work-related education deduction, trying to see how these rules might apply to the Joaquin’s situation.
Q1 – Were you established in a trade or profession prior to starting your education?
Joaquin spent six years working as a financial analyst before he began his MBA program. That six years means that Joaquin has definitely established himself in the corporate finance profession.
Q2 – Did your education maintain or improve the skills you already had prior to your education?
Joaquin improved his analytical, quantitative and financial skills as part of his MBA program. In fact, Joaquin concentrated his studies on accounting and finance topics in an effort to boost his expertise in this area. So we can say with confidence that Joaquin’s graduate education maintained and improved his professional skills.
Q3 – Do you continue to use these skills after your education?
Joaquin continued to work as a financial analyst during his MBA program. Joaquin graduated in May 2017. Later, in November 2017, Joaquin was promoted to manager when an opening appeared in the company’s west coast division. Based on this fact pattern, we can say that Joaquin continued to use his now-improved financial skills after graduating with an MBA.
Q4 – Did your educational degree qualify you for a new trade or business?
Joaquin’s MBA did not qualify him for a new trade or business. If anything, Joaquin’s MBA with a concentration in finance made him even more qualified for his current career as an analyst.
The result of our question-asking? Joaquin was indeed eligible to claim the work-related education deduction for his MBA tuition.
Now, we get to work revising Joaquin’s previous tax returns. In tax terms, this process is referred to as amending a tax return. Here’s how it turned out.
|Tax Year||Tuition Paid After Scholarships||Reduction in Federal and State Taxes|
|Tax savings over 3 years||$14,500|
Note: the tuition and tax numbers have been rounded for simplicity.
What’s Different About Amending Compared to a Current Year’s Tax Return?
Sometimes people need to revise a previously filed tax return. The process for doing that is called amending a tax return.
In other words, if you are a student and you have not yet filed your tax return, we can prepare your tax return and claim the tuition deduction for work-related education. That is the typical process for claiming a tax deduction.
Amending a tax return is an additional process. We prepare forms to tell the IRS, essentially, we need to revise a previously filed tax return. We show our math, and explain why we are making the revisions.
There are a number of differences between amended tax returns compared to original tax returns. Original tax returns can be filed electronically, but amended returns have to be mailed to the IRS. Clients can request direct deposit of refunds on original tax returns, but the IRS will mail paper checks to people who are getting refunds from an amended return.
Amending Sounds Great, But is There a Chance that the IRS Will Audit Me?
There’s a three-part answer to this question.
On one level, the IRS does not tell us what triggers an audit. That’s a closely guarded secret at the IRS. All tax returns have a chance of being audited by the IRS.
On a second level, the IRS reviews amended tax returns more closely. The IRS wants to make sure that amended returns claiming additional deductions are proper. Amended returns may or may not be audited. Sometimes the IRS will ask additional questions. For example, sometimes the IRS will ask to see receipts to prove an expense was paid, before the IRS will finish processing the amended return.
On a third level, we take pro-active steps to protect you just in case the IRS has additional questions or audits the amended return. We ask you to upload the documents we need to verify your tuition — such as a detailed billing statement from your school. And we ask you questions to make sure you really do qualify for the work-related education deduction. That way, if the IRS decides to audit your amended return, we will already be farther along in the process, because we will have the documentation needed to address the IRS’s concerns.
That being said, amending a tax return by itself does not guarantee the IRS will audit you. But we want to be prepared, just in case.
What Does One Need to Amend a Tax Return?
We will need copies of your previous tax returns, plus copies of your Form 1098-T, and a billing statement from the college showing in detail all the payments made to the school. It would also be beneficial to have receipts for books, computers and other materials you needed to buy for your classes.
What if My Tuition for the Year Exceeds My Income for the Year?
Quite often, this situation results in client having what’s called a “net operating loss” for the year.
A net operating loss (NOL) happens when the total amount of certain types of deductions is greater than a person’s total income for the year. The work-related education deduction is one of the select few deductions that can generate an NOL.
Here’s how NOLs work. The net operating loss is a number representing amount of certain deductions that aren’t fully used up on a tax return for a particular year. That NOL amount then gets moved to a different tax year, where it reduces income in that other year and generates additional tax savings. Under the default rules, an NOL is first carried back two years.
For example, if a student has an NOL for the year 2016, that NOL amount will first be carried back to the student’s tax return for the year 2014. Thus, the student will end up filing two amended returns, one for 2016 and one for 2014, to claim the full tax savings from the tuition expense deduction.
In other words, if your tuition for the year exceeds your income for the year, and you qualify for the work-related education deduction, then the unused portion of your deduction moves backwards in time to reduce your income. This results in reducing taxes not just for the year in question, but also for previous years.
What are the Deadlines for Amending Tax Returns?
Absent special circumstances, the deadline for amending a tax return is three years from the original filing due date.
For example, the original due date for filing a tax return for the year 2017 was April 17, 2018. Three years from this original due date is April 17, 2021. Therefore, a client has until April 17, 2021, to amend their tax return for the year 2017 and still claim additional refunds from the IRS.
As of right now, clients are eligible to amend their tax returns for the years 2015, 2016 and 2017.
If amending a tax return results in the client having a net operating loss (NOL), that NOL can be carried back to the two previous years, resulting in an additional amended return and additional tax refunds. That means an NOL generated from the year 2015 can be moved back to 2013, an NOL from 2016 can be moved back to 2014, and an NOL from 2017 can be moved back to 2015. And all those NOLs can result in additional refunds.
How Long Does it Take to Get a Refund from an Amended Tax Return?
Generally speaking, the IRS processes amended tax returns in about 8 to 16 weeks. Plus, the IRS issues refunds from amended returns via paper checks mailed to the clients. So allow an additional week for delivery through the mail.
At Visor, we help working professionals just like Joaquin to pay as little taxes as possible. We can help you too.
Done filing taxes alone? Lock in discounted 2019 pricing!