Tax Deductions for Education Expenses

Here is a great tax tip I read about recently in an article by Julie Welch CPA. Her article Have Employer Pay for Your Tuition and Exclude Cost From Income addresses a tax savings technique that I have personally been using for several years. I decided for personal and professional reasons to learn to speak Spanish. I have devoted hundreds of hours and almost as many dollars to Spanish classes, tapes, and private lessons. I have taken eight semesters of college Spanish at a local universities and have studied Spanish abroad in Mexico and Guatemala. I have Spanish-speaking clients and have been involved in court cases as a referee where the parties have presented their claims and defenses in Spanish.

I have also taken many classes on business, technology, and tax and accounting topics over the years.
As a small business owner, the costs of these classes are deductible business expenses.

Ms Welsh writes in her article that education expenses can reduce taxes in one of three ways:

First, job related education expenses can be deducted, along with other miscellaneous itemized deductions, to the extent they exceed 2% of the adjusted gross income. Education expenses are deductible if they are: job related, do not qualify a person for a new business, and are not taken to meet the minimum educational standards for qualification in a person’s business. The costs of obtaining an undergraduate degree do not qualify because they are usually meeting the minimum educational standards. The costs of obtaining a graduate degree, especially in business, generally qualify if a job is in the same subject area as the classes unless the degree qualifies that person
for a new business, such as law or medicine. Examples of some of the costs that can be deducted include tuition, books, supplies, car expenses, and travel costs.

Second, job-related education expenses [paid by your employer] can be excluded as a working condition fringe benefit. Many employers used this approach when the educational assistance provisions temporarily expired in prior years.

Third, education expenses under an employer’s educational assistance program can be excluded. This is generally the best approach. Check to see if the employer offers an educational assistance plan. If the employer does, up to $5,250 from income can be excluded. Although meals, lodging, and transportation costs cannot be reimbursed, the costs that can be reimbursed tax-free include: tuition, books, supplies and equipment. An employer can either pay the expenses directly to the school or reimburse the taxpayer after they are paid. Proof of the expenses will need to be provided, such as receipts for tuition and books. Unlike the deduction for education expenses, the subjects being studied do not have to be business or job related. Thus, a college degree can be completed or non-business courses can be taken. However, subjects considered a sport, game, or hobby are ineligible unless required as part of a degree program or related to an employer’s business. Graduate courses are also included in this exclusion.

Savings include both income tax and Social Security tax. Additionally, many states do not tax educational assistance reimbursements, thus saving even more.

- Mark S Gleason CPA
  www.lakes-cpa.com