Pursuing your MBA will be a huge expense, and so you will definitely want to save on taxes for the years you spend back in school, pursuing your dreams.
While you’ll definitely want to take advantage of all the standard education credits available for students in the USA, you might have heard about the possibility of a full tuition tax deduction on your tax returns. Given that fully deducting tuition can result in savings of around $15,000, that’s an exciting prospect. Unfortunately, it’s no longer an option.
Tax Codes Have Changed
If you’re studying in the U.S., you need to become familiar with the country’s complex and ever-shifting tax code. 2017 was the last year where you could deduct graduate school tuition in full, a shift that affected and frustrated a huge number of students last year.
That’s because the Tax Cuts and Jobs Act of 2017 phased out any itemized deduction for work-related education, along with a host of other deductions affecting businesses and individuals in America. This had huge ramifications for MBA students and anyone else pursuing professional degree programs, and the changes often weren’t welcome.
Starting in 2018, MBA students were no longer able to deduct the cost of graduate school tuition and course materials as itemized deductions. (The deductions will technically return in 2026… unless Congress extends the law, which is very much a possibility.)
Above all else, this means that any information online regarding MBAs prior to 2018 is outdated. Don’t make the mistake of assuming you can deduct your MBA based on old information, that ship has unfortunately sailed.
Other Tax Benefit Options
There are however some other programs to make up for the eliminated deductions. Starting in 2018, there are two key tax benefits available for MBA students filing resident tax returns. Note that these benefits are NOT available to international students filing non-resident tax returns.
First, students can deduct up to USD $4,000 on their tuition as an above the line deduction. 4000$ isn’t everything, but it’s something! To qualify for this deduction, you need an income for the year of USD $80,000 or less – USD $160,000 for a married couple.
Alternately, but not additionally, students can take a tax credit for 20% of their tuition costs, but this Lifetime Learning tax credit tops out at $2,000, only half of the above, making it a less attractive option if you’re applying to a top MBA program. To qualify for this program, you’ll need an income of USD $66,000 or less, and USD $132,000 for a married couple.
We won’t sugar coat it – these benefits are far less advantageous compared to the previous system, where you deduct education expenses in full. On the other hand, tax credits are more attractive than deductions since they provide a dollar for dollar reductions regarding your tax liability. That means that a $2,000 tax credit saves you $2,000 in taxes. Depending on your income this could be significantly more advantageous—particularly if your income is low enough that you wouldn’t be taxed much anyway.
Good News for the Self-employed
There was also surprising good news for the self-employed. While changes to American tax law eliminated work-related education deductions for employees, at least for now, they left this deduction in place for anyone self-employed. If that sounds strange, illogical, and confusing—welcome to the tax code! This means that if you’re an MBA student who’d already established a career as an independent contractor or freelancer (notably a freelance consultant) – you can still deduct the cost of your MBA tuition in full against your self-employed income.
As you can see, the US tax code is a beast with all kinds of exemptions and privileges – and you’ll want to consult a tax professional ahead of time to fully understand your costs. In general, the IRS reviews less than 0.5% of all tax returns each year but they will almost certainly flag returns making outdated deductions, and the last thing you want is an audit. The IRS will look for deviations from the norm, and writing off thousands of dollars in unreimbursed business expenses for the year is a huge red flag. It’s just not worth it to file based on previous years’ information.
Every person’s tax liability is different based on employment, income, marital status and more, so you should evaluate your personal financial situation in depth to determine the most financially beneficial strategy. There’s no replacing a dedicated tax professional in this regard – they’re paid to keep up with this stuff.
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