MBA Tuition can be tax-deductible - keep an eye on it!

Thanks for the info Nink. But Nink, where does it say that tax deductions does not apply to FT students who are pursuing an MBA to advance in the same field that they were in pre-MBA? Is this an interpretation of #3? For example, why would an analyst on Wall Street be not able to qualify for tax deductions when pursuing a FT MBA to become an associate or similar? It's possible to become an associate without an MBA.

I was pretty clear about why FT students can't take the deduction after bullet point #3. FT students are not currently working in their current trade or business. They are not WORKING. When it comes to internal revenue code, gross income is interpreted and defined BROADLY while expenses/deductions are defined narrowly. It's just how the law is written.

On top of that, DEDUCTION is not a CREDIT. Credit is a dollar for dollar deduction on your tax bill, while deduction is just a subsidy. For example, if a PT MBA student qualifies for MBA deduction, then he/she is qualified to deduct (portion not paid by employer) his/her tuition as part of Misc deduction with 2% adjusted gross income limit (which means you can deduct only the amount that exceed 2% of your AGI). And before it gets to that, you have to understand that if your MBA tuition for the year cost you $10,000 as PT student and you fall into (say) 20% tax bracket, then the govt is only providing you subsidy for 20% of the tuition, meaning the 80% of the tuition is still coming out of your pocket. On top of that, if you make too much AGI, then none of it would be picked up by the govt because you can only deduct the amount that exceeds 2% of your AGI.

As you can see, the gov't wrote the tax laws so it only applies to specific targeted individuals. Also, if you find a tax preparer who is willing to deduct your MBA tuition (even though it doesn't quite qualify), know that you will be liable for your own tax return for 3 years (statute of limitation), not your tax preparer. (when you get your refund, it means IRS agrees with your math for the tax return. It doesn't mean they audited your tax return and agree that your tax return is correct and etc) That's why you hear all these insane stories about H&R Block and Jackson Hewitt (among others) getting "warned" for their excessive deductions and promises made to their clients. In the end, taxpayer will be liable for his/her tax return. Under the current law, tax preparers are barely reprimanded even though there are proposals to change that.

The article actually did give her reasoning behind getting her MBA.



No comment as to bb's second point.

I think it's important to note that it appears she attempted to deduct the full cost of her MBA tuition as a business deduction for work-related education. This is why, as nink says, it really doesn't apply to FT MBA students because we're not working while we take courses. You could try to argue that you're self-employed during your 2 years of MBA, but good luck getting the IRS to agree with you on that.

This is a separate deduction from the lifetime learning credit or higher education tuition and fees deduction, both of which can be taken regardless of whether the education is related to your work. However, both of these are phased out at pretty moderate income levels (~$60,000), and only cover a very small portion of what you will pay for MBA tuition ($2000 credit for lifetime learning credit or $4000 deduction for tuition).

So bottom line: assuming your income is less than $60,000, which it almost certainly will be for at least 1 tax year while you're in an MBA program, there are tax benefits related to tuition but you shouldn't expect to be able to deduct the full cost.

How about deducting FT application expenses?

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Thanks Nink and Jerz for all your great detailed replies. Another reason I ask is because of this link: https://nowackcpa.com/MBA-deduction.html

Is the logic behind the link valid? Doesn't it contradict #3?

I have a tax planner that I've used for years. We had this conversation some time ago, and she indicated that it was, "at best" a gray area. Her opinion was that it was generally very difficult to argue that the deduction would be appropriate and would materially increase the odds of audit. Based on her advice, I chose not to try to do it.

I've heard some people make the argument that if you deduct and dont get caught then great, if you do deduct and you have to fight it and win, then great, and if you deduct and fight it and loose, worst case you just have to pay what you would have paid anyway. Thats a pretty lame argument to me, but some people buy into it.

What's the flaw in this argument?

For starters:



Executive MBA students usually take classes on weekends, once a month or twice or month (or other similar schedule) while holding a FT job. So if he/she is pursuing an EMBA for the purpose of advancing his/her career in his/her company (and meets all the required criteria), then of course he/she can take it. He/she is currently working in his/her trade or business, he/she is enhancing his/her skill related to current job, etc etc.

EMBA students are usually executives who make lots of money. That's why the article goes into AMT tax and etc. AMT tax is another way of calculating tax for high income individuals where typical deductions get added back to the tax base, and as a result, he/she has bigger tax base and tax bill.

Also notice the long "disclaimer" in the last paragraph. As rhyme (graduate of FT Booth MBA with godlike GPA and concentration in finance) and Jerz (who is former Big 4 CPA btw) mentioned above, FT students should really stay away from this deduction. It's not worth the trouble.

For starters:

1) Penalties and Interests

If you end up settling, usually one can negotiate to reduce or (even wipe out) the penalties but interest on your outstanding tax balance is never negotiable (from what i remember).

Also, if you end up losing, your debt to IRS will be reported to the credit agency and say goodbye to that new job, new home, new car and etc.

2) Legal expenses

Unless you are the type who would choose to defend yourself while on murder trial as defendant, you are going to need a tax lawyer or tax advocate to defend you against the IRS. That's expensive.

Sure, that woman in the article won against IRS by herself without any representation but she's an anomaly, not a rule. She also had detailed record kept to defend her cause. The burden of proof is on the taxpayer, not on IRS.

Few months ago, Swiss banks had a deadline to reveal US tax evaders with secret Swiss bank accounts. IRS had a deadline for these individuals to come clean and more people than IRS's original estimate voluntarily revealed their secret stash before the deadline. Dealing with IRS is one headache you should avoid if you can.

The other flaw in the argument is that if you can't pay them back (which is totally plausible considering you probably wouldnt have a job at that point), they can put a lein on your future earnings, which is in of itself an ugly thing im sure.... Also, I'd be willing to be that even if you DID win, once you've been selected for an audit your odds of being selected again increase a heck of a lot. Who wants that hanging over their head? There's also the difference between tax evasion and tax avoidance -- technically, overstating deductions is considered tax evasion not avoidance and I wouldn't want to have to argue otherwise in court.

Setting aside the credit score issues, if it does show up on your background check (and a lein certainly would, as would any legal procedings against you) I can't imagine trying to get a job, much less a finance job, with that.

The logic is specious at best. His engineering example implies he believes FT MBA tuition can qualify. However, the deduction is for work-related expenses. If you are in a full-time MBA program, you are not working. No work = no work-related expenses. Completely apart from all that, even if you keep detailed records and have the same exact fact pattern as the woman in the WSJ article, you could still lose your case against the IRS. Decisions by a tax court such as this one do not carry the weight of precedent, so other tax judges may rule differently. I'm sure I could find a judge that I could convince that any FT MBA wouldn't qualify since regardless of what you do the education qualifies you for a new trade (since so many MBAs do in fact change careers).

And, as rhyme points out, do you really want to piss off the IRS?

Here is part 2: Q&A with a tax accountant
https://bucks.blogs.nytimes.com/2010/01/ ... eductions/

More on M.B.A. Tuition Deductions

Last week, we described how a ruling in United States Tax Court clarified the rules for deducting tuition for a graduate degree in business and explained broadly when you can deduct the cost of your M.B.A.

The gist was that you could deduct it if you could establish that you were in a certain trade or business before getting an M.B.A. and could connect the dots between your classes and skills to show that the degree would help you maintain or improve your skills in that specific trade or business.

In response, a number of readers asked about how student loans, returning to school full time and certain employer reimbursement policies would affect their ability to deduct the cost of their M.B.A. To help answer these questions, we again turned for help to Saul Brenner, a tax partner at the accounting firm Berdon.

FYI for anyone that might view this post.

Both my brother and I wrote off the MBA. I attended INSEAD - a ten month program - and my brother attended Stanford - a two year program. Both were full-time, and we were both successful. I was not audited, although my brother was. However, his audit was due to his inclusion of housing and transportation expenses.

End of the day, he had all his information in order and was not penalized in anyway, although the audit sounded like a hassle.

Figured that I'd chime in given there's a link to my blog. It's certainly easier to justify the executive MBA to the IRS for the primary reason that you likely haven't changed jobs and you haven't changed employers. You're doing it for future gain, but that gain isn't usually tied into your graduation like it is for most full timers. When you stop your career to go to b-school, you're usually doing it to jumpstart your career and get into jobs that require the MBA so that you get the comp bump. What's happened since the economy has gone into the crapper, many MBA grads are going back to basically the same job function that they had pre-MBA (maybe a different employer, but essentially, the same job). As such, it becomes very easy to deduct.

The bottom line with all of this is that should you choose to deduct it, know that there's a strong likelihood for an audit. So you need to know the nooks and crannies of the law. Yes, luck helps. But at the end of the day, the law is the law. The sweet spot for this opportunity is where an MBA candidate has NOT changed careers, has NOT taken a job requiring the MBA and is in a line of work where the MBA is helpful, but NOT required. So long as that's true, you should be able to justify your MBA.

Cheers,
Josh Nowack, MBA, CPA
Duke / Fuqua Class of 2002

I'll add this -- I think the lifetime learning credit, albeit small, applies here as well provided your income is below a certain threshold (which it should be for most).


Aveek Guha, President, https://mbadaycamp.com/school_prospects.php

Well, I wouldn't say all FT bschoolers couldn't pull this off. I'm planning on going FT to MBA programs next year and definitely will consider whether to go for the deduction.

Why?

I currently have an LLC that runs an online/internet marketing business of mine. I plan to continue running that business during school. The yearly profits from the business should exceed the MBA costs.

Tom