Is an MBA tax deductible?

The answer isn't as straightforward as you might think. While you may be able to get a tax deduction or tax credit for your MBA, your eligibility depends on your situation.

nless you have a good accountant, you will need to spend a lot of time learning tax law to figure out whether you qualify for the Lifelong Learning Credit or a tuition or student loan deduction. The following is a general overview of MBA tuition deduction and not a substitute for advice from the IRS or a good accountant.

Lifelong Learning Credit

• What it is: Deduction of up to $2,000 per student

• What it covers: Qualified education expenses (including money paid to the school for books, supplies and equipment) for graduate education

• Non-refundable: While the Lifelong Learning Credit can be used to reduce your tax to zero, but if the credit won't be rewarded to you if it's more than your taxes

• There is no limit on the number of years you can apply.

• More Information:Tax Benefits for Education 2011 (PDF), Chapter 3

Tax credits save you more money than tax deductions, but there are fewer of them and they can be harder to get. The other higher education tax credit, the American Opportunity Credit, can only be applied toward post-secondary degrees and not graduate school.

MBA Tuition Deduction

If you don’t qualify for the Lifetime Learning Credit, you may qualify for an MBA tuition deduction.

• What it is: Deduction of up to $4,000 per student

• Who it covers: Those with Modified Adjusted Gross Income of less than $65,000 ($122,000 for joint filers) who aren't classified as dependents.

• What it covers: 
  • Education that improves the skills needed to do your job
  • Education required by your employer or by law

• What it doesn't cover:
  • Courses your employer already paid for
  • Education that qualifies you for a new trade or business (law, nursing, accounting) -- even if you don't leave your current job

Since an MBA degree generally doesn't qualify you for a new career, they can be deducted. You need to look at your individual situation, however, before automatically assuming that you can deduct your MBA.

Many MBA tax cases have gone to court and several are still pending. One of the most famous cases is Lori Singleton-Clarke v. Commissioner where Lori Singleton-Clarke said she got an MBA to improve her managerial skills at her nursing job, but the IRS claimed that she couldn't deduct her MBA because the degree qualified her for a new job. The tax court, however, believed Singleton-Clarke when she said that she got the MBA to boost her business management skills, and only changed jobs so she could work closer to home. Singleton-Clarke won because she provided good evidence. Many MBA tax cases are lost, because of the "new job"/"new career" rationale of the IRS.

Student Loan Interest Deduction

Since most MBA students end up relying on loans to pay for at least part of their education, it's a good idea to have an understanding of student loan interest deductions.

• Who it’s for: Those with Modified Adjusted Gross Income of less than $75,000 ($150,000 for joint filers) who isn't a dependent

• What it covers: Up to $2,500 interest on on loans you are obligated to pay