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.
Far too often, we come across part-time and executive MBA students who have never heard of the possibility of deducting tuition expenses on their tax returns. This is especially disappointing because these part-time MBAs and executive MBAs are actually more likely to be eligible for this write-off than their full-time peers.
At Visor, we have a long history of working with MBA clients to write-off the costs of tuition. Yet, in our experience, full-time MBAs are typically much more familiar with this tax strategy.
Why is this the case? Is it because full-time MBAs who’ve given up working for two years are more eager to capture the tax savings? 😉
Whatever the reason, this blog helps set the record straight for part-time and executive business school students
The income limitations are not relevant for this deduction
While the standard education credits, such as the Lifetime Learning Credit, have income phase-outs, writing off tuition as a work-related education deduction does not. The lack of an income phaseout is especially relevant to part-time and executive MBAs who are often still working while enrolled in school, and thus are over the income threshold.
For instance, the lifetime learning credit fully phases out once a person’s “modified AGI” exceeds $66,000 if single or $132,000 if married. That implies a student would get zero tax savings for their tuition expenses if they exceed these income limits. However, with the write-off, income limitations are not a factor.
We think these income limits might even explain why part-time and executive MBAs often miss out on this write-off, because they’ve been incorrectly told that they earn too much income to deduct the costs of tuition.
Eligibility requirements are typically easy to meet for part-time and executive MBAs
The key to the work-related education deduction is determining your eligibility. The rules, which you can read more about here, are far from black and white. The tax law leaves room for interpretation, so it’s important to talk with a tax advisor familiar with the IRS’s typical rulings on this deduction.
The key element MBAs must demonstrate to qualify for the deduction is a continuity of skills. This implies that:
- You must use business skills in your career prior to starting the MBA program,
- The MBA program must enhance the skills used in your profession
- You must use those enhanced skills in your career upon completing your MBA
For part-time and executive MBAs who have returned to school to help advance their existing career, this is typically a very cut and dry case, making you a great candidate for the work-related education deduction.
How much are the savings and how to claim them?
The tax savings from this deduction are typically very significant. That’s because the standard education credits are capped at $2,000 of tax savings. But for part-time and executive MBAs who are over the income phaseouts, your total savings from these credits might be absolutely nothing.
With the work-related education expense, we can write off the cost of tuition against your income. The rules are a bit complex, but effectively your tax savings will be as much as your marginal tax rate times your total qualified tuition expenses. Results will vary based on specific circumstances, for instance, depending on your total income, marital status, and other financial factors.
Let’s look at a quick hypothetical example to illustrate the savings. Take Mary, she’s a product manager at Google in Los Angeles and attends UCLA’s part-time MBA weekend program. Her and her husband jointly earned $250,000 of income in 2017. Mary also had tuition expenses totaling $60,000. They earn too much to save anything from the standard education tax credits. Luckily though, the work-related education write-off results in tax savings of $6,616! And, that is just for 2017 – she can still go back and amend tax years 2015 & 2016 if she has unclaimed tuition expense in either of those years.
Part-time MBAs and executive MBAs are both great candidates to write-off their business school tuition expenses. To determine if you qualify, reach out to a Visor tax professional who will assess your eligibility free of charge. In fact, you won’t owe us anything until we first calculate your potential tax savings and let you decide whether you want to file. And it’s not too late to amend 2015, 2016, and 2017 tax returns to claim the tax savings if you were unaware of this tax break at the time.
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