Is Graduate School Tuition Tax-Deductible?

Graduate school tuition is sometimes tax-deductible. There are two avenues a taxpayer can take to either deduct or credit tuition payments: a lifetime learning credit and deducting tuition on Form 1040. Master of Business Administration, or MBA, tuition is a special case. According to the "NY Times," taxpayers can deduct the cost of a graduate degree if they can establish they were in a trade before they earned the degree and that the degree helps with skills specific to that profession.

  1. Deducting Graduate Tuition From Form 1040

    • Taxpayers can choose to deduct up to $4,000 in tuition expenses as an above-the-line deduction on Form 1040. Above-the-line deductions reduce adjusted gross income; a common above-the-line deduction is an Individual Retirement Account (IRA). Of note, income limits apply for the full deduction: Singles can only earn up to $65,000; students who are married filing jointly max out at incomes of $130,000. For a $2,000 deduction, the range for single filers is $65,000 to $80,000; for married joint filers, the range is $130,000 to $160,000. This tuition deduction expired December 31, 2011, but may be extended by Congress to the 2012 tax year.

    Lifetime Learning Credit for Tuition

    • Taxpayers can deduct graduate tuition using the Lifetime Learning Credit. The maximum credit is $2,000. The credit is calculated by multiplying tuition paid by 20 percent. For example, if a taxpayer paid tuition of $4,000, the Lifetime Learning Credit would be $800 — $4,000 times 0.20. There are income limits for this credit — the maximum adjusted gross income allowed for the full credit is $51,000 for single filers and $102,000 on a joint return. The credit is eliminated at $61,000 for singles and $122,000 for joint filers.

    MBA Degree Tuition

    • Deducting tuition for an MBA degree is a special situation. According to the "NY Times," a taxpayer has to must establish that the MBA is directly related to the job held prior to attending graduate school. The taxpayer also must show that the MBA builds or sharpens skills in the job. For example, if a teacher goes to business school and changes careers to become a investment banker, she couldn't deduct the cost of tuition because banking is a new trade for the former teacher.

    Warning

    • Taxpayers looking to deduct graduate tuition can't use the American Opportunity Credit. This credit only applies to undergraduate courses. This credit is attractive because it covers 100 percent of the first $2,000 in tuition payments, with an additional 25 percent credit for tuition, with a maximum credit of $2,500. Another restriction is that the credit is only applicable for a taxpayer's first undergraduate degree.

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