Deduct Graduate School on Your Taxes? It’s Possible

Income Taxes, Personal Taxes, Taxes
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Deducting Graduate School on Your Taxes? It's Possible

People with a master’s degree typically earn about $400,000 more over their lifetime than people with a bachelor’s degree, according to the Census Bureau. Of course, getting a master’s can be very expensive — an average $17,385 per year in tuition and fees alone, according to the National Center for Education Statistics.

But tax pros say certain people might be able to deduct some or even most of the cost. Here’s what they say you need to know to do it right.

Check out our quiz at the bottom to see if this deduction might be for you.

Stay in the same line of work

If you’re hoping to deduct the cost of a master’s degree so you can change careers, think again, says Josh Nowack, a certified public accountant in Irvine, California. The IRS has rules for deducting work-related education, he notes. The education has to be required by your employer or by law in order to keep your current salary, position or job status, and it has to have a business purpose for your employer. If the education isn’t required, it must at least maintain or improve the skills needed in your current work.

That means an accountant might get to deduct the cost of a master’s degree in taxation but not the cost of a medical degree, for example, says Kevin Chou, a CPA in Philadelphia who works frequently with clients pursuing a Master of Business Administration degree.

Going back to school to meet minimum requirements for your current trade or business isn’t deductible either, unless the minimum requirements changed after you were hired, according to the IRS. There are special rules for teachers.

There’s one other snag, too, Nowack warns. If the schooling qualifies you for a new trade or business, there’s no deduction. “That’s the No. 1 sticking point,” he says. Whether you actually enter that new trade or business is irrelevant, he says.

» MORE: Not gonna work for you? The Lifetime Learning Credit might.

Keep good records

Tuition, books, supplies, lab fees and even certain transportation costs can be deductible, but personal living expenses typically aren’t, Nowack says. Also, you may not be able to deduct expenses your employer reimburses you for, he notes.

Keep your tuition bills and book receipts, of course, but also keep your transcripts, a copy of your resume and a copy of your employer’s tuition reimbursement policy. They’ll help you make a case for your deductions if you’re audited, Nowack says. Hang onto your admissions essay, too, Chou adds; it can be evidence of your intent to stay in your current field.

You’ll need to use Schedule A, or Schedule C if you’re self-employed, to take the deduction when you file your taxes. For employees, the deduction is the amount greater than 2% of your adjusted gross income, Chou says. If your AGI is $100,000 and your graduate school expenses are $20,000 for the year, for example, only the expenses over $2,000 would be deductible — $18,000, in this case. If you’re self-employed, deduct the expenses from your self-employment income.

Keep time off short

If you quit your job or take a leave of absence to go to school, you still might qualify to take the deduction — so long as you’re not off the job too long. The IRS allows taxpayers a year off from work; more than that is deemed enough time to qualify for a new trade or business, which is a big no-no when it comes to this deduction.

Hire a tax pro

Though recent court cases provide some clarification about the rules, deducting work-related education is still a disputed area of the tax world, so it’s a good idea to consult a tax professional. The audit risk can be high, Nowack warns.

“There are certainly things that are decisively white and decisively black in the tax code. This goes well into the gray,” he says.

Tina Orem is a staff writer at NerdWallet, a personal finance website. Email: torem@nerdwallet.com.