Can you deduct graduate degree program tuition expenses?

February, 10 2022 by Glynis Miller, CPA, MST

Enrolled in a graduate degree program in conflict resolution. Can I deduct the tuition expenses as a job-related education expense in the federal and nys taxes?

-Frankie



Frankie,

You asked if you could deduct the tuition expenses for your enrollment in a graduate degree program for “Conflict Resolution” as a job-related education expense on your federal and NY state taxes. While you have asked a very direct question, it must be noted that federal and state tax laws can be very different. In certain circumstances, the state may not conform to the same tax treatment offered by the federal tax code. Thus, we will address your question in two separate parts.

 

Federal Treatment

Generally speaking, tuition expenses that would qualify as job-related education must meet certain requirements for federal purposes. The actual reporting differs for self-employed taxpayers and taxpayers employed by someone else when they have qualified job-related education expenses. Either way, the general requirements are as follows:

• Your education must either be required by your employer or the law to maintain your present salary, status, or job, or
• Your education must maintain or improve the skills needed in your present work.
• The education cannot be completed merely to meet any minimum education requirements of your present job or business,
• The education cannot be a part of a program of study that qualifies you for a new trade or business.

If these conditions are met, the education is said to be “ordinary and necessary” to your job or business. Some decisive factors are used in determining whether the graduate degree qualifies for business expense deduction will generally include all of the following;

• You (taxpayer) were already established in your job or business;
• The graduate degree maintains or improves the skills used in your current job or business; and
• The tasks and activities you were qualified to perform before the graduate degree are similar to those you qualified for afterward.

With job-related deductible expenses, there are generally no income threshold or filing status requirements for taking the deduction. Self-employed individuals would claim the qualifying education as a business expense deduction. While an individual who is an employee would normally claim the deduction as part of miscellaneous itemized deductions on Schedule A, only the expenses that exceed 2% of your AGI would be deductible. Due to tax law changes in the Tax Cuts and Jobs Act of 2017 (TCJA), employee business expense (EBE) deductions are currently not allowed. The ability to deduct otherwise qualifying EBE has been suspended for tax years beginning January 1, 2018, through tax years ending December 31, 2025. So for the federal return, you currently cannot claim a deduction for your graduate program, even if it otherwise qualifies.

Another option for qualifying education expenses would be Lifetime Learning Credit for federal purposes. The credit is allowed on qualifying education up to $10,000. The credit will phase out with a modified adjusted gross income of $80,000 to $90,000 ($160,000 to $180,000 for Married Filing Joint) taxpayers. The maximum credit per taxpayer would be a non-refundable $2,000 credit when allowed.
 

New York State Treatment

It appears that New York offers an education credit for “College Tuition,” but graduate expenses do not appear to be eligible for this refundable personal income tax credit. The other option is to claim qualifying education expenses as personal itemized deductions. And while the job-related education cannot be claimed as in itemized deduction federally, it would appear New York does not conform to the suspension of this deduction as limited by the TCJA. Thus, qualifying graduate expenses may be claimed as itemized deductions for state tax purposes, even when not deductible for federal purposes. However, determining what expenses qualify as job-related education would be the same as those that qualify under federal tax law.

Education benefits are highly audited by both the IRS and states. Thus, if audited, you would likely need to show that you met all of the above criteria outlined. It could include a written narrative specifically outlining how you met the requirements, a letter from your employer (if employed) supporting your position, and school transcripts and course syllabuses that can show how each course helps maintain or improve your skills. Receiving a promotion or pay raise may not disqualify you, presuming you can substantiate the aforementioned decisive factors. In essence, you will be required to show you are performing essentially the same duties before and after obtaining your degree in Conflict Resolution and how it helped improve your skills to do your job more effectively.

Sincerely,
Glynis