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Educational expenses for employees can yield tax benefits under two different law provisions, each of which has its own detailed requirements.
In addition, there are several types of tax breaks that apply to education benefits for all individuals, not just employees. These include the the American Opportunity credit, the Lifetime Learning Credit, and the exclusion of education loan interest.
In this section, we'll concentrate on two types of educational benefits: employer-provided educational assistance, and qualifying work-related education.
Employer-provided assistance. Up to $5,250 per year can be provided to an employee as reimbursement for educational expenses as part of an employee benefit plan. Tuition, fees, books, supplies, and tools are considered reimbursable "educational expenses."
The tax law does not require the education to be related to the job, or part of a degree program, although some employers may impose these requirements under their particular plan. Also, covered educational expenses may include graduate level course work, even courses leading to a professional degree.
Work-related education. If you don't receive employer-provided assistance under the type of plan described above, or if the assistance you receive is more than $5,250 per year, there is another law provision under which you may receive a tax break for education.
Under the qualifying, work-related education rules, the cost of education of any type (whether or not it leads to a degree, and whether it is technical, vocational, undergraduate, graduate, or professional) will be deductible if it meets either of these requirements:
However, even if the education expense meets these requirements, it is not qualifying if either:
The education must relate to your present work, not just to work you may take up in the future or work that you held in the past. However, if you stop work for a year or less (for example, to go to school full-time) and then resume your work, this temporary absence will not render the education nonqualifying.
If all of these rules are met, you can deduct your educational expenses. Furthermore, if the employer reimburses you for these expenses, it can be treated as a nontaxable working-condition fringe, and the reimbursements should not be reported as taxable income on your W-2 form. Nondiscrimination rules do not apply to this type of working-condition fringe benefit, so small business owners can take advantage of this deduction as well.
Types of expenses that qualify. Under the qualifying work-related education expense rules, you can deduct a much broader range of expenses: the costs of tuition, fees, books, supplies, transportation and travel costs, and other expenses such as the cost of research, typing and copying when writing a paper as part of an educational program.
Generally, you can deduct the standard mileage rate for the mileage you drive one way from work to school. (From January 1, 2011, through June 30, 2011, the standard mileage rate for the business use of a car was 51 cents per mile. From July 1, 2011 through December 31, 2011, the standard mileage rate for business use of a car was 55.5 cents per mile.) Alternatively, you can deduct the cost of bus, subway, train, cab, or even airfare to get to school. If you are regularly employed and go to school on a temporary basis (generally, irregularly or for a matter of days or weeks), you can also deduct the cost of going from school to home. However, if you go from home directly to school you can deduct the round-trip costs only if you are going from home to school on a temporary basis.
If you drive, you can choose to use the actual cost method to compute your vehicle costs; however, this generally involves a great deal of recordkeeping for very little payback. Regardless of whether you use the standard mileage rate or the actual cost method, you can always deduct the cost of parking and tolls.
If you must travel and stay overnight to get to school or to a particular seminar, training course, trade or business association meeting, etc., you can deduct the cost of travel, lodging, and 50 percent of the cost of meals for yourself under the usual rules related to travel. However, you cannot deduct the cost of travel that is in itself a form of education there must be some type of specific class, seminar, convention, etc., involved.
Claiming work-related education expenses. For employees, if you are deducting transportation, travel, or meals in connection with qualified education, these should be added to your other expenses of the same type and deducted on IRS Form 2106 or 2106-EZ.
Other education costs of employees (the costs of tuition, fees, books, supplies, etc.) would normally be reported on Line 4 of either Form 2106 or 2106-EZ.
If you are self-employed, education costs would be reported on Schedule C, with most costs being reported on Line 27 as "other expenses" but the costs for your car or truck, meals, and travel being added to Lines 9, 24b, and 24a respectively. If you file Schedule C-EZ, deduct these expenses on Line 2.