A deduction is available for the cost of education if the education
maintains or improves the skills related to your trade or business.
Educational costs are also deductible if the education is required (e.g., by
law or an employer) to keep your position or job.
Conversely, educational costs aren't deductible if the education is
required to get into the field (as opposed to staying in the field) or
qualifies you for a new trade or business.
For example, a doctor cannot deduct basic medical school costs because
they are required to enter the field. Once he becomes a doctor, however, any
courses he takes to keep current or learn new techniques are deductible.
The expenses of becoming a specialist within a field may or may not be
deductible. For example, if the goal all along was to become a psychiatrist
and the individual went straight through medical school, internship, and
then into a psychiatric residency, all of the costs would be treated as
required to enter the field and wouldn't be deductible. However, an
internist who has already been practicing medicine for a period of time, can
deduct the costs of a psychiatric program he enters as improving skills
within his profession.
Many taxpayers take law-related courses as helpful to their professions
or businesses. Seminars within your profession on law-related issues are
deductible since they improve your skills. On the other hand, law school
courses (even if taken for the same purpose) are generally not deductible
because they lead to qualifying you for a new profession.
If your educational costs are deductible under the above tests, you can
include the transportation costs involved in getting from work to the course
location or vice versa. Transportation between home and the course location
is deductible for education undertaken on a temporary or irregular basis. If
the transportation is in the nature of a commute it's not deductible. If
you're away from home for deductible education, you can include the costs of
travel, meals (at 50%), and lodging as well. However, travel as the
educational vehicle itself (e.g., a French teacher's trip to France) isn't
deductible.
In the case of an employee, education expenses that are deductible under
the above tests may be claimed as an itemized deduction, but only to the
extent the expenses, along with other miscellaneous itemized deductions,
exceed 2% of the taxpayer's adjusted gross income (AGI). And in the case of
taxpayers with high AGI, miscellaneous itemized deductions are subject to a
further overall limit on itemized deductions.
You must reduce your deductible expenses to the extent you receive a
tax-exempt scholarship for the education. Similarly, to the extent an
employee has his education costs reimbursed by his employer, the amount
qualifying as deductible is reduced. (How the deduction and reimbursement
are treated for tax purposes depends on how the employer sets up the
reimbursement procedures. If you'd like me to review your situation, please
call.)
In addition to taking an itemized deduction for education expenses, if
you incur debt in obtaining education, interest you pay on student loans
taken out may be deductible as an above-the-line deduction, i.e., it's
subtracted from gross income to determine AGI. This means that you don't
have to itemize to take the deduction, and that the deduction isn't subject
to the overall limit on itemized deductions. The maximum deduction is $2,500
per year, subject to a phaseout for taxpayers with high AGI.
Instead of taking a deduction for education expenses, taxpayers may claim
the Hope/Lifetime Learning credits for qualified tuition and related
expenses. The maximum Hope credit a taxpayer may claim is $1,500 per year
per student, for the first two years of undergraduate education at an
eligible education institution. The maximum Lifetime Learning credit that
may be claimed is $2,000 per year per taxpayer, for any post-high
school education (including courses to acquire or improve job skills) at an
eligible education institution. The Hope/Lifetime Learning credits are also
subject to phaseout for taxpayers with high AGI.
An above-the-line deduction (through 2005) is available for certain
higher education expenses—regardless of whether the education is related
to the taxpayer's trade or business or employment. Generally, the
deduction is available for tuition and fees required for enrollment or
attendance of an eligible student at a post-secondary educational
institution, but not for books, supplies, transportation costs, living
expenses, etc. The deduction is allowed for the qualifying expenses of the
taxpayer, the taxpayer's spouse, and the taxpayer's dependents for whom a
dependency exemption is allowed.
The maximum deduction is $4,000, available to taxpayers with AGI of up to
$65,000 for singles and $130,000 for joint filers, and $2,000 for singles
with higher AGIs up to $80,000, or joint filers with AGIs up to $160,000.
The deduction can't be claimed in a given year with respect to an
individual's expenses if, during that year, the Hope/Lifetime Learning
credit is claimed with respect to that individual. In addition, the
deduction is subject to certain other restrictions.
Taxpayers who incur education expenses must decide how to take maximum
advantage of these complex rules. Taxpayers who take the standard deduction
instead of itemizing their deductions will want to claim the Hope/Lifetime
Learning credits or the higher education expense deduction. Other taxpayers
will have to decide whether to take an itemized deduction, the Hope/Lifetime
Learning credits, or the higher education expense deduction for their
education expenses. Taxpayers who aren't subject to the overall limit on
itemized deductions may find that an itemized deduction for education
expenses is more advantageous than the Lifetime Learning credit because
itemized deductions reduce a taxpayer's taxable income, and thus the
education expenses save taxes at a taxpayer's top tax rate. Plus, the
itemized deduction is not subject to any amount or AGI limits, as are both
the Lifetime Learning credit and the higher education expense deduction. On
the other hand, if the education expenses aren't related to a taxpayer's
current trade or business, but are incurred to acquire or improve job
skills, even for a new trade or business, the expenses aren't deductible as
an itemized deduction, but might qualify for the Lifetime Learning credit or
the higher education expense deduction.
