Tax Benefits for Work-Related Education

Important Changes for 2002

Standard mileage rate.   Generally, if you drive your car to and from school, you can deduct 36½ cents per mile. See Using your car under Transportation Expenses.

Employer-provided educational assistance program extended.   The tax-free status of up to $5,250 of employer-provided educational assistance benefits each year has been extended through 2010. Beginning January 1, 2002, the benefit applies to both undergraduate- and graduate-level courses.

Introduction

If you are working and have work-related educational expenses, you may be able to deduct all or part of the cost of your education as a business expense deduction. This chapter discusses:

• Qualifying work-related education,
• What work-related educational expenses are deductible, and
• Where to deduct these expenses.

Your work-related educational expenses may also qualify you for other tax benefits, such as the tuition and fees deduction and the Hope and lifetime learning credits. You may qualify for these other benefits even if you do not meet the requirements listed above.

Also, keep in mind that your work-related educational expenses may qualify you to claim more than one tax benefit. Generally, you may claim any number of benefits as long as you use different expenses to figure each one.

Tuition and fees deduction.   You can deduct tuition and fees you pay that are required for higher education courses. You can claim these expenses (up to $3,000), even if you do not itemize deductions on Schedule A (Form 1040). See chapter 4 of Publication 970, Tax Benefits for Education, for more information.

Hope and lifetime learning credits.   These education credits may be available for tuition and related expenses you pay for higher education. Generally, credits are more beneficial than deductions because they reduce your tax rather than your taxable income. The Hope credit could reduce your tax by up to $1,500 in 2002, and the lifetime learning credit by $1,000. For more information, see chapter 36.

Other tax benefits for education.   In addition to the tax benefits that are available for your work-related education expenses, there are benefits for educational expenses that are not work related, such as your child's college tuition and fees and the interest on your student loan. Information on cancellation of student loans is in chapter 13, and information on other education benefits is in Publication 970.

Useful Items You may want to see:

Publication

• 463   Travel, Entertainment, Gift, and Car Expenses
• 508   Tax Benefits for Work-Related Education
• 970   Tax Benefits for Education

Form (and Instructions)

• 2106   Employee Business Expenses
• 2106-EZ   Unreimbursed Employee Business Expenses
• Schedule A (Form 1040)   Itemized Deductions

Qualifying Work-Related Education

You can deduct the costs of qualifying work-related education as business expenses. This is education that meets at least one of the following two tests.

1. The education is required by your employer or the law to keep your present salary, status, or job. The required education must serve a bona fide business purpose of your employer.
2. The education maintains or improves skills needed in your present work.

However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it:

1. Is needed to meet the minimum educational requirements of your present trade or business, or
2. Is part of a program of study that will qualify you for a new trade or business.

You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree.

You can use Figure 29-A as a quick check to see if your education qualifies (see next page).

Education Required by Employer or by Law

Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. This additional education is qualifying education if all three of the following requirements are met.

1. It is required for you to keep your present salary, status, or job,
2. The requirement serves a business purpose of your employer, and
3. The education is not part of a program that will qualify you for a new trade or business.

When you get more education than your employer or the law requires, the additional education can be qualifying education only if it maintains or improves skills required in your present work. See Education To Maintain or Improve Skills.

Example.   You are a teacher who has satisfied the minimum requirements for teaching. Your employer requires you to take an additional college course each year to keep your teaching job. If the courses will not qualify you for a new trade or business, they are qualifying education even if you eventually receive a master's degree and an increase in salary because of this extra education.

Education To Maintain or Improve Skills

If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments, and academic or vocational courses.

Example.   You repair televisions, radios, and stereo systems for XYZ Store. To keep up with the latest changes, you take special courses in radio and stereo service. These courses maintain and improve skills required in your work.

Maintaining skills vs. qualifying for new job.   Education to maintain or improve skills needed in your present work is not qualifying education if it will also qualify you for a new trade or business.

Temporary absence.   If you stop working for a year or less in order to get education to maintain or improve skills needed in your present work and then return to the same general type of work, your absence is considered temporary. Education that you get during a temporary absence is qualifying education if it maintains or improves skills needed in your present work.

Example.   You quit your biology research job to become a full-time biology graduate student for one year. If you return to work in biology research after completing the courses, the education is related to your present work even if you do not go back to work with the same employer.

Indefinite absence.   If you stop work for more than a year, your absence from your job is considered indefinite. Education during an indefinite absence, even if it maintains or improves skills needed in the work from which you are absent, is considered to qualify you for a new trade or business. Therefore, it is not qualifying education.

Education To Meet Minimum Requirements

Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. The minimum educational requirements are determined by:

1. Laws and regulations,
2. Standards of your profession, trade, or business, and
3. Your employer.

Once you have met the minimum educational requirements that were in effect when you were hired, you do not have to meet any new minimum educational requirements. This means that if the minimum requirements change after you were hired, any education you need to meet the new requirements can be qualifying education.

You have not necessarily met the minimum educational requirements of your trade or business simply because you are already doing the work.

Example 1.   You are a full-time engineering student. Although you have not received your degree or certification, you work part time as an engineer for a firm that will employ you as a full-time engineer after you finish college. Although your college engineering courses improve your skills in your present job, they are also needed to meet the minimum job requirements for a full-time engineer. The education is not qualifying education.

Example 2.   You are an accountant and you have met the minimum educational requirements of your employer. Your employer later changes the minimum educational requirements and requires you to take college courses to keep your job. These additional courses can be qualifying education because you have already satisfied the minimum requirements that were in effect when you were hired.

Requirements for Teachers

States or school districts usually set the minimum educational requirements for teachers. The requirement is the college degree or the minimum number of college hours usually required of a person hired for that position.

If there are no requirements, you will have met the minimum educational requirements when you become a faculty member. You generally will be considered a faculty member when one or more of the following occurs.

1. You have tenure.
2. Your years of service count toward obtaining tenure.
3. You have a vote in faculty decisions.
4. Your school makes contributions for you to a retirement plan other than social security or a similar program.

Example 1.   The law in your state requires beginning secondary school teachers to have a bachelor's degree, including 10 professional education courses. In addition, to keep the job, a teacher must complete a fifth year of training within 10 years from the date of hire. If the employing school certifies to the state Department of Education that qualified teachers cannot be found, the school can hire persons with only 3 years of college. However, to keep their jobs, these teachers must get a bachelor's degree and the required professional education courses within 3 years.

Under these facts, the bachelor's degree, whether or not it includes the 10 professional education courses, is considered the minimum educational requirement for qualification as a teacher in your state.

If you have all the required education except the fifth year, you have met the minimum educational requirements. The fifth year of training is qualifying education unless it is part of a program of study that will qualify you for a new trade or business.

Example 2.   Assume the same facts as in Example 1 except that you have a bachelor's degree and only six professional education courses. The additional four education courses can be qualifying education. Although you do not have all the required courses, you have already met the minimum educational requirements.

Example 3.   Assume the same facts as in Example 1 except that you are hired with only 3 years of college. The courses you take that lead to a bachelor's degree (including those in education) are not qualifying education. They are needed to meet the minimum educational requirements for employment as a teacher.

Example 4.   You have a bachelor's degree and you work as a temporary instructor at a university. At the same time, you take graduate courses toward an advanced degree. The rules of the university state that you can become a faculty member only if you get a graduate degree. Also, you can keep your job as an instructor only as long as you show satisfactory progress toward getting this degree. You have not met the minimum educational requirements to qualify you as a faculty member. The graduate courses are not qualifying education.

Certification in a new state.   Once you have met the minimum educational requirements for teachers for your state, you are considered to have met the minimum educational requirements in all states. This is true even if you must get additional education to be certified in another state. Any additional education you need is qualifying education. You have already met the minimum requirements for teaching. Teaching in another state is not a new trade or business.

Example.   You hold a permanent teaching certificate in State A and are employed as a teacher in that state for several years. You move to State B and are promptly hired as a teacher. You are required, however, to complete certain prescribed courses to get a permanent teaching certificate in State B. These additional courses are qualifying education because the teaching position in State B involves the same general kind of work for which you were qualified in State A.

'Figure

Education That Qualifies You for a New Trade or Business

Education that is part of a program of study that will qualify you for a new trade or business is not qualifying work-related education. This is true even if you do not plan to enter that trade or business.

If you are an employee, a change of duties that involves the same general kind of work is not a new trade or business.

Example 1.   You are an accountant. Your employer requires you to get a law degree at your own expense. You register at a law school for the regular curriculum that leads to a law degree. Even if you do not intend to become a lawyer, the education is not qualifying because the law degree will qualify you for a new trade or business.

Example 2.   You are a general practitioner of medicine. You take a 2-week course to review developments in several specialized fields of medicine. The course does not qualify you for a new profession. It is qualifying education because it maintains or improves skills required in your present profession.

Bar or CPA Review Course

Review courses to prepare for the bar examination or the certified public accountant (CPA) examination are not qualifying education. They are part of a program of study that can qualify you for a new profession.

Teaching and Related Duties

All teaching and related duties are considered the same general kind of work. A change in duties in any of the following ways is not considered a change to a new business.

1. Elementary school teacher to secondary school teacher.
2. Teacher of one subject, such as biology, to teacher of another subject, such as art.
3. Classroom teacher to guidance counselor.
4. Classroom teacher to school administrator.

What Educational Expenses Are Deductible as Business Expenses?

If your education meets the requirements described earlier under Qualifying Work-Related Education, you can generally deduct your work-related educational expenses as business expenses. If you are not self-employed, you can deduct business expenses only if you itemize your deductions on Schedule A.

You cannot deduct expenses related to tax-exempt and excluded income.

Deductible expenses.   The following educational expenses can be deducted.

• Tuition, books, supplies, lab fees, and similar items.
• Certain transportation and travel costs.
• Other educational expenses, such as costs of research and typing when writing a paper as part of an educational program.

Nondeductible expenses.   Educational expenses do not include personal or capital expenses. For example, you cannot deduct the dollar value of vacation time or annual leave you take to attend classes. This amount is a personal expense.

Unclaimed reimbursement.   If you do not claim reimbursement that you are entitled to receive from your employer, you cannot deduct the expenses that apply to the reimbursement.

Example.   Your employer agrees to pay your educational expenses if you file a voucher showing your expenses. You do not file a voucher, and you do not get reimbursed. Because you did not file a voucher, you cannot deduct the expenses on your tax return.

Transportation Expenses

If your education qualifies, you can deduct local transportation costs of going directly from work to school. If you are regularly employed and go to school on a temporary basis, you can also deduct the costs of returning from school to home.

Temporary basis.   If your attendance at school is realistically expected to last (and does in fact last) for 1 year or less, you go to school on a temporary basis (unless there are facts and circumstances that would indicate otherwise).

If your attendance at school is realistically expected to last for more than 1 year or if there is no realistic expectation that the attendance will last for 1 year or less, the attendance is not temporary, regardless of whether it actually lasts for more than 1 year.

If attendance at school initially is realistically expected to last for 1 year or less, but at some later date the attendance is realistically expected to last more than 1 year, that attendance will be treated as temporary (unless there are facts and circumstances that would indicate otherwise) until your expectation changes. It will not be treated as temporary after the date you determine it will last more than 1 year.

Attendance at school on a temporary basis was formerly defined as attendance on an irregular or short-term basis (generally a matter of days or weeks).

You can file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return, for any year in which you used the former definition of attendance on a temporary basis. However, you generally must file the amended return within 3 years from the time you filed the original return or within 2 years from the time you paid the tax, whichever is later.

Deductible expenses.   If you are regularly employed and go directly from home to school on a temporary basis, you can deduct the round-trip costs of transportation between your home and school. This is true regardless of the location of the school, the distance traveled, or whether you attend school on nonwork days.

Transportation expenses include the actual costs of bus, subway, cab, or other fares, as well as the costs of using your car. Transportation expenses do not include amounts spent for travel, meals, or lodging while you are away from home overnight.

Example 1.   You regularly work in Camden, New Jersey, and go directly from work to home. You also attend school every work night for 3 months to take a course that improves your job skills. Since you are attending school on a temporary basis, you can deduct your daily round-trip transportation expenses in going between home and school. This is true regardless of the distance traveled.

Example 2.   Assume the same facts as in Example 1 except that on certain nights you go directly from work to school and then home. You can deduct your transportation expenses from your regular work site to school and then home.

Example 3.   Assume the same facts as in Example 1 except that you attend the school for 9 months on Saturdays, nonwork days. Since you are attending school on a temporary basis, you can deduct your round-trip transportation expenses in going between home and school.

Example 4.   Assume the same facts as in Example 1 except that you attend classes twice a week for 15 months. Since your attendance in school is not considered temporary, you cannot deduct your transportation expenses in going between home and school. If you go directly from work to school, you can deduct the one-way transportation expenses of going from work to school. If you go from work to home to school and return home, your transportation expenses cannot be more than if you had gone directly from work to school.

Using your car.   If you use your car (whether you own or lease it) for transportation to school, you can deduct your actual expenses or use the standard mileage rate to figure the amount you can deduct. The standard mileage rate for 2002 is 36½ cents per mile. Whichever method you use, you can also deduct parking fees and tolls. See Car Expenses in chapter 28 for information on deducting your actual expenses of using a car.

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