MBA Tax Deduction
For most taxpayers, tuition dollars fall under the Hope or Lifetime learning credit. Some others will also qualify for a tuition deduction. There is one more option which doesn't have a direct limitation or phaseout on income. That would be for an unreimbursed job expense. In simple terms, you spent some money on your job, but weren't reimbursed by your employer. Or alternatively, you employer reimbursed you in cash, but then also reported the same amount as wages on your Form W-2.
The unreimbursed business expense is a neat way to take a deduction primarily because there aren't any direct income caps, phaseouts or qualifications other than the following:
- The education cannot qualify you for a new trade or business
- The education cannot be part of the minimum skills to enter into a profession
- The education must maintain or improve your skills
To elaborate a little further on the above comments. If you decide to go on for law school - the law school bill wouldn't be deductible because going to law school (for most states) is a basic requirement before becoming a lawyer. And even if you didn't want to become a lawyer, by virtue of it being a major requirement of being a lawyer, going to law school itself would qualify you for a new business so law school is going to be nixed.
Business school by contrast really doesn't inherently qualify you for pretty much anything. I say this as a card-carrying member of Duke University's Fuqua School of Business Alumni Association. Now that said, if you enter business school after a successful career as a school teacher and are pursuing your MBA to become an investment banker - then the fact pattern says that you have a new trade or business. But let's just say that you're an engineer, you pursue your MBA, and then continue on your engineering career track, then you will pretty much be successful in justifying the write-off. This situation is very common with executive MBA students who are pursuing their MBA programs while working for the pure reason of getting ahead.
My caveat with this deduction is that it is subject to a 2% floor of your adjusted gross income and the deduction is added back for Alternative Minimum Tax (AMT) purposes. So, if you had income of $100,000, then the first $2,000 of your write-off is excluded. And if you're subject to AMT, then this deduction may be limited. You also may lose out on the deduction if you're subject to a phase out of your itemized deductions. That said, for many taxpayers, it can take a very big bite out of your tax burden while you've pursued your degree.
You would also still qualify for the deduction if you paid for your degree with student loans. You would even qualify if your employer reimbursed you for the expense, but then included the reimbursement as income in Box 1 of your Form W-2.
Lastly, I would not take this deduction without consulting a very well qualified tax advisor and probably wouldn't use a do-it-yourself solution on this. This deduction is heavily audited and frequently disallowed - so knowledge of the code here is very important. Frankly, the two years I did not prepare my own return were the two years of my business school program just for this reason. I even wanted to demonstrate to the IRS that I had another CPA sign off on whether or not I qualified. Paying the couple hundred dollars to get some extra comfort may be worth the $50,000-$100,000+ in deductions headed your way.
