An advanced degree will be good for your resume, which could very well translate to higher earnings. But higher earnings also mean the Internal Revenue Service will be able to take more money at tax time. So, it stands to reason that the IRS would see graduate school as a deductible expense. Unfortunately, it doesn’t exactly work that way. But there are alternatives to consider.
The Previous Tax Law
Until 2018, you were allowed to deduct education expenses that help you perform better at your current job. The idea was that these educational costs were work expenses, which make them part of the cost of earning a living. The limits were that the education had to be directly related to doing the job you were doing, not used to qualify for a different job. However, with the 2018 tax law changes, the entire unreimbursed qualified employee education deduction was wiped out.
The New Law
The Tax Cuts and Jobs Act of 2017 eliminates unreimbursed business expenses for those employees who aren't self-employed. The thinking is that now that the standard deduction has increased to $12,000 for single taxpayers and $24,000 for married taxpayers filing jointly, many Americans will no longer be itemizing their deductions. But with graduate school costing an average of $30,000 a year, you may be interested in finding options to recoup some of that money.
Options for Self-Employed Workers
If you're a contractor or you run your own business, you're in better luck. The tax law changes don't touch the self-employed. Your education costs will be itemized with all of the other expenses you claim as a part of growing a business, which will help offset the earnings you'll owe taxes on.
Lifetime Learning Credit
If you’re pursuing an advanced degree to prepare yourself for career advancement, there may be a way to get credit for it. The Lifetime Learning Credit is designed to pay 20 percent of the first $10,000, or $2,000 per tax return, to students who are enrolled in a qualifying school. Unlike the American Opportunity Tax Credit, the Lifetime Learning Credit will pay for education toward earning a graduate degree. However, to qualify to take the credit, you’ll need to have a modified adjusted gross income of $66,000 or less, or a married filing jointly income of $132,000 or less. To get the credit, you’ll need to obtain Form 1098-T from your school and use it when filing your taxes and input the amount on Form 8863, Education Credits at tax time. It’s important to note that you won’t see the credit back as a refund. It will simply be used as a credit toward any taxes you owe each year.
Employer Education Reimbursement
If you're still on salary and you have no interest in changing that, you do have another option. You can try to get your employer to reimburse you for the expense, but you likely already know whether that's an option. Increasingly, businesses are including at least partial education assistance as a job perk. If your employer doesn't offer it, consider looking for an employer that does. This could also be wrapped into your next salary negotiation. Ask, in lieu of an increase, if your employer would be willing to help pay the cost of an advanced degree. If you can demonstrate how your continuing education will benefit the business, your employer may find it easy to accommodate your request.