It’s tax season and that means medical students and residents are asking many questions about what is, and is not, deductible on their 2018 tax filings. It’s a complicated business and we aren’t tax attorneys, but we can provide you with some basic direction on the educational tax deductions and resources for more information.
The most important thing you need to know when it comes to taxes is to always seek information from a qualified tax expert. There is a lot of information floating around forums and chat rooms and most of it is contradictory at best. They promise to provide lots of confusion, little clarification and head you off in the wrong direction, which can be costly. Reading the Internal Revenue Service (IRS) website can help and much of it is written in lay terms making it fairly easy to understand. It’s a good place to start if you have the time; if you don’t, consult a tax expert to get the right answers to your questions the first time.
Tax categories for educational expenses
In general, there are four tax categories that contain deductions for educational expenses. They include:
- Student loan interest deduction
- Lifetime Learning Tax Credit
- Unreimbursed employee expenses
- Work-related education expenses
Here is the bottom line and the details on each, quoted from the IRS. (It’s not a good idea to rephrase tax regulations.)
1: Student Loan Interest Deduction
The bottom line: You can deduct student loan interest if you meet income qualifications. It can be claimed even if you don’t itemize deductions. It excludes interest paid on loans used for things other than tuition, books, equipment, room, and board. Only qualified loans from qualified lenders are included, not loans from employer-based plans or relatives.
From the IRS: If your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500.
The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040’s Schedule A.
2: Lifetime Learning Credit
The bottom line: The only requirement to claim this credit is that you pay for at least one course per year. You can also include the cost of books, supplies, and equipment if you pay the school directly “as a condition of enrollment”.
From the IRS: This credit allows you to reduce your tax bill on a dollar-for-dollar basis, up to $2,000 per return.
- The limit on MAGI is $65,000 if single (or $131,000 if married filing jointly).
- This credit is available for all years of postsecondary education.
- Credit is available for qualified expenses of tuition and fees required for enrollment.
- To help determine your lifetime learning credit, a student should receive Form 1098-T from their eligible educational institution.
3: Unreimbursed Employee Expenses
The bottom line: This category is a bit more detailed but may include things you may not be aware of such as professional membership fees and subscriptions to professional and medical journals.
From the IRS: Generally, the following expenses are deducted on Schedule A (Form 1040), line 21, or Schedule A (Form 1040NR), line 7.
You can deduct only unreimbursed employee expenses that are:
- Paid or incurred during your tax year
- For carrying on your trade or business of being an employee, and
- Ordinary and necessary
An expense is ordinary if it is common and accepted in your trade, business, or profession. An expense is necessary if it is appropriate and helpful to your business. An expense doesn’t have to be required to be considered necessary.
You may be able to deduct the following items as unreimbursed employee expenses, (we have included only those applicable to the medical field):
- Business liability insurance premiums
- Depreciation on a computer your employer requires you to use in your work
- Dues to a chamber of commerce if membership helps you do your job
- Dues to professional societies
- Educator expenses
- Home office or part of your home used regularly and exclusively in your work
- Job search expenses in your present occupation
- Laboratory breakage fees
- Legal fees related to your job
- Licenses and regulatory fees
- Malpractice insurance premiums
- Medical examinations required by an employer
- Occupational taxes
- Passport for a business trip
- Research expenses of a college professor
- Subscriptions to professional journals and trade magazines related to your work
- Tools and supplies used in your work
- Travel, transportation, meals, entertainment, gifts, and local lodging related to your work
- Union dues and expenses
- Work clothes and uniforms if required and not suitable for everyday use
- Work-related education
4: Work-related education expenses
The bottom line: This category is tricky and has resulted in more than one lawsuit from people who were denied the deduction. On the surface, it looks simple and offers deductions for expenses incurred for education required to “maintain or improve” job skills or that are required by law. However, it also includes a caveat that the education can’t be part of an effort to get a new job and that is where the problems have occurred in the past.
From the IRS: You may be able to deduct work-related education expenses paid during the year as an itemized deduction on Form 1040, Schedule A.pdf, Itemized Deductions. To be deductible, your expenses must be for education that (1) maintains or improves your job skills or (2) that your employer or a law requires to keep your salary, status, or job. However, even if the education meets either of these tests, the education can’t be part of a program that will qualify you for a new trade or business or that you need to meet the minimal educational requirements of your trade or business.
The comprehensive guide to tax deductions for education can be found on the IRS website.
There are many other questions when it comes to education and taxes, such as “Is a stipend income for tax purposes?”, and “Is a fellowship considered income for tax purposes?” (According to the American Psychological Association the answer is that both are usually tax-exempt, but there are exceptions.) Certainly, there are too many questions and too many variables for us to attempt to answer here. However, we believe that the resources we have provided here will head you in the right direction, and help you to ask informed questions of the tax expert that you consult.
Remember, Tax Day is Tuesday, April 17, 2018.