If you are unemployed or at a dead end in your career, you may decide to return to school to acquire new skills. Are there any tax benefits? Perhaps -- since there are no specific statutory provisions to indicate the boundaries of the educational deduction.
There is a general provision that "ordinary and necessary expenses paid or incurred [while] carrying on a trade or business" can be deducted. This is troublesome for someone who is unemployed, says David M. Hudson, professor of law at the University of Florida and a contributing editor to Bender's Federal Tax Service. Yet, you may qualify for the deduction by proving you were engaged in some trade or business prior to starting the education and that you intend to return to it.
"If you are an unemployed taxpayer and want to deduct educational expenses," says Hudson, "you should continue your job-seeking efforts while you are obtaining the education. Better yet, if you foresee that your job is in jeopardy, undertake the education while you still are employed. That ensures your entitlement to the deduction as well as improving your chances of getting a better job."
Here are some guidelines to help you judge whether your deduction will be allowed:
* Is the education personal? If you are taking a course in astronomy and you are a nurse, you will not be able to take a tax deduction. But if you are a nurse and take a seminar in "Health Care Practices in the '90s," the costs may be deductible.
* If the education meets a requirement of your employer or if it is mandated by law, the costs clearly are deductible. If the law states that a nurse must take a seminar to retain her license, there should be no question that it qualifies as an allowable deduction.
* Will the education maintain or improve skills required by your employment? Maintenance and improvement of skills can be accomplished by refresher courses and courses dealing with current developments in the taxpayer's field, as well as academic and vocational courses. There must be a direct relationship between the education and the taxpayer's job skills. For that reason, the Tax Court denied a deduction to a policeman for the costs of general college courses, including the study of Shakespeare.
Deductions for educational expenses which improve job skills permit someone to upgrade his position. Educational expenses incurred in obtaining a specialty in the same type of work are deductible, if the new duties are of the same general type. For example, the IRS ruled that a psychiatrist could deduct the expenses for a program that qualified him to practice psychoanalysis. The Tax Court has similarly ruled that a practicing lawyer could deduct tuition costs from an advanced degree program for the specialty of tax law.
* Is it the purpose of the education to allow the taxpayer to meet minimum educational requirements for his professional field? Even though an educational expense may pass some of the tests listed here, those same expenses will not be deductible if they are incurred to meet minimum educational requirements for employment. For example: A teacher without her degree is hired because of a shortage of teachers in the region. To continue in the job, state law (and her employer) says she must obtain a degree. When she goes for her bachelor's degree, the costs of obtaining it are not deductible.
* Does the education qualify you for a new trade or business? If the education enables a person to be employed in a new line of business, he will not qualify for a tax deduction. A recent case concerned an IRS employee attending law school to upgrade his knowledge. But the Tax Court ruled this was not a legitimate deductible expense because it qualified him for a career move. If that employee had been a typist learning word processing skills, his education would be considered a legitimate extension of his skills, and a deduction would have been granted.
"Even if you put your situation through these tests, the educational expense is still pretty vague," says Hudson. "We have to take these on a case-by-case basis, as is often true in tax law. The only sure thing we can advise is: never assume your education costs are deductible."