IMPORTANT: The new tax law effective starting 2018 eliminated the tuition write-off, with limited exceptions for self-employed MBAs. The below article is applicable only to amending past year tax returns within the statute of limitations (2015-2017). Updated 1/11/2019.
- MBA students could lose the ability to deduct their tuition costs as an itemized deduction.
The Tax Cuts and Jobs Act (H.R. 1), introduced by Representative Kevin Brady on November 2, 2017, proposes to eliminate the itemized deduction for employee business expenses, which is one way people can write off the cost of professional education.
- Also on the chopping block are five other tax breaks related to higher education: the Tuition and Fees deduction, the Hope credit, the Lifetime Learning Credit, Education Assistance Programs, and Qualified Tuition Reduction plans.
- MBA students may be able to get some benefit for their graduate school tuition under the American Opportunity Credit, which the tax bill would modify to provide a credit for the 5th year of post-secondary college education.
The tax bill would eliminate these tax breaks starting January 1, 2018. These proposals are not yet law, and could be modified or dropped as the tax bill makes its way through the House and Senate.
Under current law, individuals can take advantage of six different tax benefits for higher education. The Tax Cuts and Jobs Act of 2017 (H.R. 1) proposes to eliminate five of those benefits. Of particular relevance to MBA students, the Tax Cuts and Jobs Act proposes to eliminate the miscellaneous itemized deduction for work-related education. The work-related education deduction allows students to deduct the amount of tuition exceeding 2% of the person’s adjusted gross income for the year.
If Congress eliminates the work-related education deduction, MBA students might be able to take advantage of the American Opportunity Tax Credit. The Tax Cuts and Jobs Act proposes to expand the American Opportunity tax credit to allow students to take a tax credit for their fifth year of post-secondary education expenses. MBA students also might be able to seek tax-free reimbursement from their employer if their education qualifies as a working-condition fringe benefit.
Work-Related Education under Current Law
Students have several options for getting a tax break for education expenses. One option is to deduct college tuition as an itemized deduction for work-related education. To qualify for the deduction, the individual needs to meet all three eligibility requirements:
- (a) The education is required by the person’s employer or is required by law to maintain the person’s job, status, or salary; and the education must serve a genuine business purpose for the employer; or (b) The education maintains or improves the skills needed in the person’s current work.
- The education is not needed to meet the minimum educational requirements for the individual’s current trade or business.
- The education is not part of a program of study that qualifies the individual for a new trade or business.
Source: Publication 970, Tax Breaks for Education, IRS.gov.
If the education qualifies, individuals can deduct the tuition, supplies, books, and research costs related to the qualifying education. Self-employed persons would take this as a deduction on their Schedule C. Employees would take this as an itemized deduction for employee business expenses on Schedule A. (Curiously, self-employed persons would still be able to deduct their work-related education under the Tax Cuts and Jobs Act.)
To see how this plays out, consider a hypothetical example of Caroline. Caroline works as a product manager and decided to enroll in an evening and weekend MBA program at a top-tier university to improve her skills. Caroline earns $100,000 in salary, and paid $45,000 in tuition last year. Her federal income tax liability without the work-related education deduction was $18,738. But with the work-related education deduction, her federal income tax liability is $12,844. In other words, the work-related education deduction reduced her federal tax liability by $5,894.
Proposed Elimination of the Work-Related Education Deduction
-The Tax Cuts and Jobs Act of 2017 proposes to eliminate the itemized deduction for employee business expenses. The employee business expense deduction includes any expenses for work-related education. If this tax bill becomes law, “a taxpayer would not be allowed an itemized deduction for expenses attributable to the trade or business of performing services as an employee,” according to a summary prepared by the majority tax staff of the House Ways and Means Committee.
Why does Congress want to eliminate the deduction employees can take for their business expenses, including their work-related education? The only evidence we have for the thinking behind this elimination are two statements found in the summary prepared by Ways and Means Committee. The majority tax staff argue, firstly, “In conjunction with an increased standard deduction and lower overall tax rates, the provision would simplify the tax laws for taxpayers who currently claim deductions for employee business expenses.” (In other words, eliminating a deduction is one way to simplify tax laws.) Secondly, the majority tax staff argue that “keeping records of these expenses is often very burdensome for taxpayers, and this current-law deduction also poses administrative and enforcement challenges for the IRS.” (In other words, it’s difficult for the IRS to tell if employee business expenses are legitimate, and taxpayers sometimes do not keep the receipts and records needed to prove that their deduction is legitimate.)
Certainly, eliminating the deduction for work-related income will help generate additional tax revenue for the federal government, offsetting lost revenue from other changes, but exactly how much is unclear at this time.
Other Proposals Impacting MBA students
The Tax Cuts and Jobs Act also proposes to eliminate:
- Student loan interest deduction — an above-the-line deduction of up to $2,500.Tuition and fees deduction — an above-the-line deduction of up to $4,000 for tuition, whether undergraduate or graduate.
- Lifetime learning credit — a tax credit of up to $2,000 for tuition, whether undergraduate or graduate.
- Education assistance programs — a fringe benefit offered by some employers providing tax-free reimbursement of up to $5,250 for an employee’s tuition expenses.
The one positive from the tax bill is the proposal to modify the American Opportunity tax credit. Under current law, a tax credit of up to $2,500 is permitted for the first four years of post-secondary education. The tax bill proposes a tax credit of up to $1,250 for the fifth year of post-secondary education. The American Opportunity tax credit is available for individuals with modified adjusted gross income up to $90,000 and for married couples filing jointly with modified adjusted gross income up to $180,000.
Curiously, employers may still be able to reimburse their employees for tuition expenses, despite the elimination of education assistance programs. Under current law, employers can reimburse employees for work-related education on a tax-free basis if the reimbursement is set up as a working condition fringe benefit. The Tax Cuts and Jobs Act does not propose any changes to working condition fringe benefits.
Bottom line: if the Tax Cuts and Jobs Act passes into law the way it is written now, individuals will no longer be able to deduct their MBA tuition as an itemized deduction. The most advantageous tax move would be for MBA students to seek tax-free reimbursement for their tuition from their employer. But employers would have to set up their tuition reimbursement as a working-condition fringe benefit, and employers may or may not do this. Absent reimbursement from their employer, the most MBA students will be able to get in terms of tax benefits is the $1,250 tax credit for the fifth year of college education under the modified American Opportunity credit.
Tax Moves to Make
- Current MBA students should consider paying tuition before the end 2017 for any classes starting in early 2018. This will enable students to take a deduction for that tuition on their 2017 tax return.
- If possible, MBA students should consider talking to their employer about setting up a working condition fringe benefit program for work-related education.
- There is no impact to the deductibility of tuition paid through the tax years ending 2017. Current students and recent graduates that qualify can still claim those expenses as a deduction. This includes the ability to amend up to the past three years of tax returns if the deduction was not originally claimed.
- We recommend consulting with a tax advisor to review how these proposals will impact your tax situation.
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