Education Expense

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Article Education Expense�An Investment for a Lifetime


Author Pamela K. Revak, J.D., LL.M.


Journal The Tax Magazine, June 00


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This article reviews the deductibility of education expenses and the court decisions on certain cases. The article also introduces indirect deductions of education expenses as introduced in the Hope and Lifetime Learning Credits.


In order for education expenses to be deductible, the expense should be expenses rather than personal investments. The difference between investment and expense are further explained. Educational expenses used to acquire minimum skills for a particular profession are viewed as an investment in personal capital. Education expenses, though, that occur in the practice of the taxpayer’s existing profession are deductible because the personal capital investment has already been made. Further, T.M. Malek, 50 TCM 7, Dec. 4, 18(M), TC Memo. 185-48 states that it is near impossible to deduct the expenses incurred in attaining a bachelor’s degree, since the degree usually qualifies the taxpayer for a new trade or business.


Courts have implemented the “common sense” approach in interpreting whether or not the taxpayer has qualified for a new trade or business. In this approach, the court compares the tasks the taxpayer performed before and after the education. The deduction will be disallowed if there is a substantial difference between the tasks performed. The general rule is new skill set, new capital, no deduction; old skill set, old capital, deduction.


The examples of court cases revolved mainly around teachers and their claimed deductions. Regulations give examples of change in duties that are not considered new trades. The regulations do not allow the deductions of education expenses that result from advancing to a higher teaching status, such as elementary or secondary teacher advancing to college professor. Furthermore court cases have drawn a distinction about teaching, which states’ teaching is teaching is teaching as long as you are already a certified/licensed teacher who has met the minimum requirements for employment as such.


The government, in the late 10’s, realized that education credits were needed to cover the increasing costs of college education. The Hope and Lifetime Learning Credits, which provide a dollar for dollar reduction on income tax liability, were introduced. Each credit is phased out at certain income levels. The Hope Scholarship Credit provides a credit of up to $1500 and the Lifetime Learning Credit provides a credit of up to $1000.


The Hope Scholarship Credit provides reductions for the first two years of college education. The credit is computed as 100% of the first $1000 of tuition expenses and 50% of the next $1000 of tuition expenses.


The Lifetime Learning Credit provides reductions for any college expenses of the taxpayers, but cannot be used at the same time as the Hope Scholarship Credit. The reduction is equal to 0% of the first $5000 of tuition expenses and will be increased to $10000 of tuition expenses in 00.


This article discussed multiple tax cases revolving around education expenses deductibility. The article demonstrated the problems and vagueness in determining the deductibility of education expenses. Finally, this article provided information on the government’s solution to increasing college costs.





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