Ignorance of the tax code can be costly for MBA students, who may be able to take advantage of educational deductions and credits to lower their tax bill
Even if you're a graduate business student, a quant jock by trade, you still might want a little help with your taxes. After all, no one wants to pay the Internal Revenue Service more than is absolutely necessary. Students have certain benefits that other taxpayers do not. But they don't always know what's coming to them, which results in missed opportunities. "It's the myriad of deductions, credits, and benefits that cause confusion," says Gil Charney, a tax analyst at the Tax Institute at H&R Block (HRB) in Kansas City, Mo. "I suspect many students don't claim them because the complexity is overwhelming. It pays to do your homework." To keep more money in your pocket this tax season, educate yourself about the tax benefits for students, including what's new in 2009. For help, you can turn to the IRS 970 form, which has more than 80 pages of information on tax benefits for education. Having an accountant or tax specialist look over your return is not a bad idea, either. Whether you are a full-time MBA student or an EMBA on scholarship from your company, here is a primer on tax benefits you might be able to claim. Scholarships and Employer Assisted Plans Many an aspiring MBA has griped about the lack of scholarships for more experienced students. Still, some of you do receive tuition reduction or scholarships. If you are among them, you can claim the money as tax free if it comes from an eligible educational institution and you provide teaching or research for that institution, according to the IRS. If your employer pays your tuition as a fringe benefit for you at work, according to an e-mail from H&R Block spokesperson Gene King, the entire amount can be excluded from taxable income each year, but only if the education is required as a condition of employment. If not, the exclusion is limited to $5,250 a year. Hope and Lifetime Learning Credits Things have changed in 2009 when it comes to the best-known student tax benefits—the Hope and Lifetime Learning Credits. Now known as the AOC or American Opportunity Credit, the Hope Credit applies to undergraduates. But if they're not paying their own way, those who pay their tuition (think parents, grandparents, or guardians) may be able to claim the credit if the student is a dependent and the taxpayer's adjusted gross income does not exceed certain limits. In 2009, as part of the American Recovery Act, taxpayers can get a credit of up to $2,500 in tuition and other qualified expenses for the full four years of a traditional college education, up from two years previously. Parents who previously did not qualify for the Hope Credit because their adjusted gross income exceeded the limits may qualify now if their income is no more than $90,000, or $180,000 for taxpayers who are married filing jointly, says Charney. Why explain the Hope credit to graduate students? Some MBA students, especially those in executive programs, have adult children or spouses attending college. Since both the Hope and Lifetime Learning credits can't be claimed for the same student, they'll have to do the math to determine which credit saves them more money. The Lifetime Learning Credit is for anyone taking at least one college course, including undergraduate, graduate, and professional courses. Eligible expenses include tuition and certain out-of-pocket expenses, such as books, but not room and board for those living at a college or university. The maximum credit per family is $2,000 or 20% of the first $10,000 in expenses per year.
For 2008 and 2009, students attending eligible institutions in the Midwestern disaster areas can claim double the normal education credits ($4,000 instead of $2,000 for the maximum Lifetime Learning Credit), and room, board, and books all qualify as education expenses. The student must be enrolled in a school in the disaster areas, which were established in 2008 after severe storms, tornadoes, and floods ripped through portions of 10 Midwestern states. But the student does not have to live there, which means online MBAs or executive MBAs who travel but are enrolled in programs in those designated areas may qualify for the credit, writes King. Education credits, including the AOC and Lifetime Learning credits, are claimed on Form 8863. Student Loan Interest Deduction Student loan interest is deducted as an adjustment, and you can claim deductions on loans issued to you, your spouse, or dependents. The maximum amount of student loan interest you can claim in a year is $2,500. This is also dependent on your income. For 2009, the deduction phases out for married taxpayers filing jointly with modified adjusted gross income of $120,000 to $150,000 and $60,000 to $75,000 for single and head of household filers, writes King. Section 529 Funds Another way to use educational expenses to reduce your tax burden is through the use of a Section 529 plan, also known as a Qualified Tuition Program (QTP). Like IRAs, which allow workers to save tax-free for retirement, 529 plans allow parents to save tax-free for future educational expenses. As long as the cash is used for qualified expenses, withdrawals are also tax-free. Many parents use 529 plans to save for a child's college expenses, but they can be used by anyone, even those contemplating business school for themselves. In addition to tuition and fees, allowable expenses include software, computers, Internet service, and other educational expenses incurred by students. Some restrictions apply. For example, Charney warns that parents who live in New Jersey and have a child in college in California, for example, cannot include their New Jersey wireless Internet expenses because the student is not actually using that service. Job Hunt Expenses There are strict rules about when you can deduct expenses for the job hunt. Still, you might just fit the bill. If you are looking for a job for the first time, you cannot deduct job hunting expenses, such as unreimbursed travel, writes King. But most MBA students do not fall into that category. Those who are returning to the same trade or business they were in prior to B-school are eligible for the deduction, writes King. Career switchers and those who have been out of work for a few years or more are not. If you are eligible for the deduction, there's one proviso. On the tax return, job hunting expenses get added to all other miscellaneous itemized deductions. If the total exceeds 2% of adjusted gross income (AGI), you can deduct the excess. For example, someone with an AGI of $50,000 would need to have miscellaneous itemized deductions (including job hunting expenses) of more than $1,000. If the expenses totaled $1,500, the taxpayer could take a $500 deduction. Although tuition is costly, there are some advantages to going back to school for a graduate business degree. "For someone going to get an MBA, it pays twice," says Charney. "First, you get an education, which is an investment in your future, and then there are the tax benefits and deductions." Consider your tax breaks, adds Charney, as another source of financing for your degree.