Deductibility of Education Costs:
Individual filers frequently have questions regarding credits/deductions resulting from various education costs. There are six places to deduct your education-related expenses on your 1040 (or variant thereof):
- Employer-funded program $5,250 exclusion from gross income
- Tuition and Fees Deduction $4,000
- American Opportunity Tax Credit $2,500
- Lifetime Learning Credit $2,000
- Student Loan Interest Deduction $2,500
- Schedule A – Unreimbursed Employee Expenses (dollar amount varies)
Unfortunately, each of these has their own rules, qualifying factors, phase-outs, and restrictions. I will discuss each one from the perspective of my clients:
Employer-funded program $5,250 exclusion from gross income: This is the only one with no income phase-out!
The IRS labels this as an exclusion from gross income from EAPs. An EAP stands for “Employer Assistance Program.” These are often called “Tuition Reimbursement Program” or any variant thereof at your typical employer. The logic behind this deduction is simple:
- The company paid you additional money to reimburse tuition
- Any amount over $5,250 is included as part of your income
- This effectively removes up to $5,250 from from your gross income
What are qualifying student expenses: Books, supplies, equipment, other fees associated with the education (Baruch has an “excellence fee,” for example, which was implemented to help bridge funding shortfalls).
Excluded items are: meals, lodging, transportation, tools that can be kept and used after completing the program (computers), sports-related items.
The good news about this benefit is that there is no phase-out based on income. The income phase outs for some of these other education deductions are almost laughable for someone living and working in Manhattan ($55,000-$65,000 for the Lifetime Learning Credit, for example). The employer-funded program exclusion from gross income covers both undergraduate and graduate programs.