I've heard that a recent tax law court opinion could allow me to get a bigger return on my non-reimbursed MBA tuition expenses. Should I amend my past returns?

[Annon]

Relevant information:
- I started my MBA in 2015 and finished in 2017.
- Tuition and expenses were not reimbursed by my employer
- I have worked five years in the same field and intend to continue doing so
- the MBA is not a prerequisite for my current job, but the credential will likely benefit my career (as most credentials do)
- in past years, I believe I filed claiming the lifetime learning credit (I'm pretty sure.)

[Opus 17]

Work related education can either be claimed for one of the education credits like lifetime learning, or can be deducted as a work related expense. You can't deduct the same tuition twice. What court decision do you think impacts your choice?  Can you give more details about what you think it is, it doesn't ring a bell.

[Annon]

<a rel="nofollow" target="_blank" href="https://www8.gsb.columbia.edu/financial-aid/system/files/News%20for%20MBA%20Tax%20Deductions.pdf">ht...>

[Opus 17 · Accepted solution]

 There is nothing new here, other than a clarification that the IRS is sometimes overzealous in collecting tax. 

 The lifetime learning credit is a direct tax credit of 20% of your tuition up to $10,000 of tuition, or a $2000 maximum credit.  The deduction for work related expenses is a miscellaneous itemized deduction subject to 2% rule. Deducting tuition by this method is much less lucrative than a direct tax credit.   

Some workers whose income is too high to qualify for the lifetime learning credit will only be able to use the work related expense deduction, so this tax court case suggests that it may be easier for them to do so. 

 In your case, if you took the lifetime learning credit, you have received a larger tax benefit than the deduction.  You should only amend your tax return if you paid more than $10,000 of qualified tuition in any year. You could then claim $10,000 of tuition for the credit, and the amount over $10,000 as a work related expense.   But because work related expenses are a 2% itemized deduction, you may not get much benefit.

[Annon]

Ah, I see. So, if I'm understanding, if I had more than $20,000 (for example) in tuition-related expenses this year, I could get about $200 back after claiming $10,000 for the direct LL tax credit?

[Opus 17]

No, this is how the 2% rule works.

If you had $20,000 of tuition expenses, you claim $10,000 for the lifetime learning and $10,000 as a work expense.

Then you look at your gross income, which must be less than $65,000 or you wouldn't qualify for lifetime learning, so let's say $50.000.  2% of $50,000 is $1,000, so your work related expense deduction is reduced by $1000, leaving a $9,000 deduction.

Then you need to look to see if your itemized deductions were more than your standard deduction or not.  Let's say you had $3,000 of itemized deductions so the program used the $6200 standard deduction instead.  If you claim $9,000 of work related expense, now your itemized deductions are $12,000, which is $5800 more than the standard deduction.  Claiming an extra $5800 of deductions would reduce your taxable income by that amount, which would reduce your tax owed by 25% of that amount (if you are single and your income was $50,000, you are in the 25% bracket.)  So it could save you $1350 in tax.

If you really paid $20,000 in tuition on an income of $50,000, then deleting the lifetime learning credit and claiming the entire amount as a work related expense might actually give you a larger benefit, if you are in the 25% tax bracket.  (The credit is 20%, the tax brackets are 15% and 25%, so it depends on exactly where you fall in the brackets, and what other itemized deductions you have.)

The only way to be sure would be to test multiple scenarios.

[Annon]

Wow. Thanks! Wouldn't Turbo Tax's software automatically test those scenarios?

[Opus 17]

Not really.  Turbotax can test the 3 different eduction credits, but it isn't really set up to understand when an education expense might also be a work expense.