Tax Help for Paying the Cost of Graduate School

About three million postgraduate students were expected to enroll this year. As a rule, the cost of graduate school is very pricey. Some students can obtain fellowships and grants to defray some or all of the cost. Others, however, can use tax law rules to ameliorate the out-of-pocket expense.

1.     Lifetime learning credit

You can take a tax credit of up to $2,000 for total qualified expenses for you, your spouse, or your dependent when attending graduate school. More specifically, the credit is 20% of the first $10,000 pay for qualified expenses. This credit reduces your tax bill dollar for dollar, so it can be a helpful savings. However, it likely won’t be a meaningful offset to the actual expenses you pay.

What’s more, the ability to claim the credit in whole or in part is limited by your modified adjusted gross income. For 2015, the MAGI limit on claiming a full credit is $55,000 for singles and $110,000 for joint filers. The credit phases out for MAGI between $55,000 to $65,000 for singles, and $110,000 to $130,000 for joint filers.

Note:  The limits on the credit percentage and expenses are not adjusted for inflation; the MAGI limit may be adjusted annually.

2.     Work-related expense deduction

If the schooling is work-related you may be able to claim an itemized deduction for all of related costs, including tuition, books, and travel. There are two main tests for deductibility:

• You must already have met minimum job requirements for what you do. The courses that you take are merely designed to maintain or improve these skills.
• The courses do not qualify you for a new trade or business.

The treatment of some graduate courses is clear. For example, a teacher pursuing a masters or doctorate degree can deduct the cost of the courses. The cost of an MBA usually is also deductible because it rarely qualifies the student for a new trade or business. The only catch is that the student must be in a trade or business; someone going directly from college to an MBA program doesn’t yet have a trade or business.

However, the cost of law school courses usually does not qualify for a deduction because the courses entitle the student to become a lawyer (a new trade or business). For example, a person who received a law school education in Germany but enrolled in law school in the U.S. in order to practice here could not deduct the cost of law school. He wasn’t a lawyer (only a law student) in Germany, so his U.S. education did not meet tax law requirements.

3.     529 plans

Tax-free withdrawals from 529 plans are not limited to undergraduate school. You can use funds in your 529 plan to pay for post-graduate school. Those who are thinking of pursuing a graduate education may want to fund a 529 for themselves. This creates a tax-deferred savings account that can be tapped at any age to pay for certain graduate school expenses.

4.     Employer-paid education assistance

Rather than paying for graduate school yourself, your employer may pay some or all of it. This can be a very valuable tax-free fringe benefit. Companies may offer:

• An education assistance program. This limits tax-free benefits to $5,250 per year. The courses you take do not have to be job related to receive the tax break, but the terms of the employer’s plan may have other restrictions on which courses qualify under the plan.
• Reimbursements for work-related courses. An employer may agree to reimburse you for the cost of graduate school courses that help you on your job. There is no dollar limit on the amount of the reimbursement that is tax free as long as the courses are job-related.

5.     Deduction for student loan interest

If you take loans to help pay for graduate school, the interest on these loans is tax deductible up to $2,500 annually. The deduction is from gross income so you don’t have to itemize to claim it. However, there is an income limit on deductibility. The full deduction in 2015 is allowed if your MAGI is no more than $65,000 if single, or $130,000 if married filing jointly. A partial deduction is allowed for MAGI between $65,000 and $80,000 if single, or $130,000 and $160,000 if married filing jointly.

Conclusion

Graduate school can boost your lifetime earnings potential. However, the cost of this education doesn’t come cheap. Check on tax breaks that can make the financial burden just a little easier.