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Chapter 29. Employees' Educational Expenses



Introduction

This chapter discusses how employees deduct their costs of work-related
education. To figure the deduction, you must know:

∙  Whether the courses qualify,

∙  What expenses are deductible, and

∙  How to report the expenses.

First, you must determine whether the courses you are taking are qualifying
courses. Not all courses are qualifying education. Courses must meet certain
requirements before the related expenses can be deducted. This is explained
in the first section.

If your courses qualify, you can then determine which expenses qualify to be
deducted. Only certain expenses of education are deductible. This is explained
in the second section.

If you know which expenses qualify, you can then determine how to report
those educational expenses. You may not be able to fully deduct all of your
expenses. This is explained in the third section.

Related publication and form.

This chapter refers to the following:

    Publication 508, Educational Expenses

    Form 2106, Employee Business Expenses

Qualifying Education

Education must meet certain requirements before the related expenses can
be deducted. If these requirements are met, the education is qualifying
education. You may be able to deduct the costs of qualifying education.
Qualifying education is explained below.

Requirements. The education must:

1)  Be required by your employer or the law to keep your salary, status,
    or job (and serve a business purpose of your employer), or

2)  Maintain or improve skills required in your present work.

These requirements are met even if the education may lead to a degree.

Exception. Even if your education meets one of the requirements listed
above, it is not qualifying education if it:

1)  Is needed to meet the minimum educational requirements of your present
    trade or business, or

2)  Is part of a program of study that can qualify you for a new trade or
    business, even if you have no plans to enter that trade or business.

See Nonqualifying Education, later.

Present work. Your education must relate to your present work. Education that
will relate to work you may enter in the future is not qualifying education.
Education that prepares you for a future occupation includes any education
that keeps you up-to-date for a return to work or that qualifies you to
reenter a job you had in the past.

Temporary absence. If you stop work for a year or less and then go back to the
same kind of work, your absence is ordinarily considered temporary. Education
during a vacation, temporary leave, or other temporary absence from your job
is considered related to your present job. However, after your temporary
absence you must return to the same kind of work.

Example. You quit your biology research job to become a full-time biology
graduate student for one year. If you return to work in biology research after
completing the courses, the education is related to your present work. You may
even choose to take a similar job with another employer.

Education Required by Employer or by Law

Once you have met the minimum educational requirements for your job, your
employer or a law may require you to get more education. This additional
education must be required for you to keep your present salary, status, or
job. It must serve a business purpose of your employer and not be part of
a program that will qualify you for a new trade or business.

When you take more education than your employer or the law requires, the
additional education is qualifying only if it maintains or improves skills
required in your present work. See Education to Maintain or Improve Skills,
later.

Example. You are a teacher who has satisfied the minimum requirements for
teaching. Your employer requires you to take an additional college course
each year to keep your teaching job. You take a course and pay for it yourself.
This is qualifying education even if you eventually receive a master's degree
and an increase in salary because of this extra education.

Education to Maintain or Improve Skills

If your education is not required by your employer or a law, it must maintain
or improve skills needed in your job to be qualifying education. This includes
refresher courses, courses on current developments, and academic or vocational
courses. However, courses you take that qualify you for a new trade or
business are not qualifying education. See Education to Qualify for a New
Trade or Business, later.

Example. You repair televisions, radios, and stereo sets for XYZ Store. To
keep up with the latest changes, you take special courses in radio and stereo
service. These courses maintain and improve skills required in your work.

Nonqualifying Education

If you need education to meet the minimum requirements for a job or the
education is part of a program of study that will qualify you for a new job,
it is nonqualifying education. You cannot deduct the costs of nonqualifying
education. Education that is nonqualifying is explained below.

Education to Meet Minimum Requirements

Education needed to meet the minimum educational requirements for your present
job is nonqualifying education. The minimum education necessary is determined
by:

1)  Laws and regulations,

2)  Standards of your profession or business, and

3)  Your employer's requirements.

You have not necessarily met the minimum educational requirements of your
trade or business simply because you are already doing the work.

Once you have met the minimum educational requirements that were in effect
when you were hired, you do not have to satisfy this rule again. This means
that if the minimum requirements change, any education you need to meet the
new requirements is qualifying education.

Example 1. You are a full-time engineering student. You work part time as an
engineer for a firm that will employ you full time as an engineer after you
finish college. Although your college engineering courses improve your skills
in your present job, you have not met the minimum job requirements for a
full-time engineer, and the education is nonqualifying.

Example 2. You are an accountant and you have met the minimum educational
requirements of your employer. Your employer later changes the minimum
educational requirements and requires you to take college courses to keep your
job. These additional courses are not minimum requirements because you already
have satisfied the initial minimum requirements. However, a new accountant
coming into the firm would have to satisfy these new minimum requirements,
and the education needed to meet the requirements would be nonqualifying.

Example 3. You have your own accounting business. To improve your skills,
you take several courses in tax accounting. You have already met the minimum
educational requirements to be an accountant. These courses improve skills
required in your business and are not part of a program of study that will
qualify you for a new trade or business. These courses are qualifying
education.

Requirements for Teachers

This discussion applies to teachers and others employed by educational
organizations. The minimum educational requirement for teachers is usually
set by the state or school district. It is based upon a minimum number of
college hours or a college degree usually required of a person hired for
that position.

If no requirements exist, you will have met the minimum educational
requirement when you become a faculty member. You generally will be
considered a faculty member when one of the following occurs.

1)  You have tenure.

2)  Your years of service count toward obtaining tenure.

3)  You have a vote in faculty decisions.

4)  Your school makes contributions for you to a retirement plan other
    than social security or a similar program.

Example 1. Your state law requires beginning secondary school teachers to
have a bachelor's degree, including ten professional education courses. In
addition, to keep the job, a teacher must complete a fifth year of training
within 10 years from the date of hire. However, if qualified teachers cannot
be found, a school may hire persons with only 3 years of college on the
condition that they get the bachelor's degree and the required professional
education courses within 3 years.

Under these facts, the bachelor's degree, whether it includes the ten
professional education courses or not, is considered the minimum
educational requirement for qualification as a teacher in your state.

If you have all of the required education except the fifth year, you have met
the minimum educational requirements. However, if the fifth year will qualify
you for a new trade or business, it is nonqualifying education. See Education
to Qualify for a New Trade or Business, later.

Example 2. Assume the same facts as in Example 1. If you have a bachelor's
degree and only six professional education courses, the additional four
education courses would be qualifying education. Because a bachelor's degree
is the minimum requirement for qualification as a teacher, you have already
met the minimum requirements, even though you do not have all of the required
courses.

Example 3. Assume the same facts as in Example 1. If you are hired with only
3 years of college, the courses you take that lead to a bachelor's degree
(including those in education) are nonqualifying education because they are
required to meet the minimum education for employment as a teacher.

Example 4. You have a bachelor's degree and you work as a temporary instructor
at a university. At the same time, you take graduate courses toward an advanced
degree. The rules of the university state that you may become a faculty member
only if you get a graduate degree. Also, you may keep your job as an instructor
only as long as you show satisfactory progress toward getting this degree.
You have not met the minimum educational requirements to qualify you as a
faculty member. The graduate courses are nonqualifying education.

Certification in a new state. Once you have met the minimum educational
requirements for your state, you are considered to have met the minimum
educational requirements in a new state, even if you must take additional
education to be certified in the new state. Any additional education you
need is qualifying education.

Example. You hold a permanent teaching certificate in State A and are employed
as a teacher in that state for several years. You move to State B and are
promptly hired as a school teacher. You are required, however, to complete
certain prescribed courses to get a permanent teaching certificate in State
B. These additional courses are qualifying education because the teaching
position in State B involves the same general kind of work for which you
were qualified in State A. You have already met the minimum requirements
for teaching and have not entered a new trade or business.

Professor's research costs. College or university professors who conduct
research in their area of competence are considered to have met the minimum
requirements if certain conditions are met. The research must be undertaken
as a means of carrying out the duties expected of a professor and without
expectation of profit apart from salary. Minimum requirements of education
have been met, regardless of tenure, when the professor meets the school's
criteria for employment.

Education to Qualify for a New Trade or Business

Education that is part of a program of study that can qualify you for a new
trade or business is nonqualifying education. This is true even if you are not
seeking a new job.

If you change duties but still do the same general work you do now, the new
duties are not considered a new trade or business.

Example 1. You are an accountant. Your employer requires you to get a law
degree at your own expense. You register at a law school for the regular
curriculum that leads to a law degree. Even if you do not intend to become a
lawyer, the education is nonqualifying because the law degree will qualify
you for a new trade or business.

Example 2. You are a general practitioner of medicine. You take a 2─week
course to review new developments in several specialized fields of medicine.
The course does not qualify you for a new profession. It is qualifying
education because it maintains or improves skills required in your present
profession.

Example 3. While working in the private practice of psychiatry, you enter
a program to study and train at an accredited psychoanalytic institute.
The program will lead to qualifying you to practice psychoanalysis. The
psychoanalytic training does not qualify you for a new profession. It is
qualifying education because it maintains or improves skills required in
your present profession.

Bar or CPA Review Course

Review courses to prepare for the bar examination or the certified public
accountant (CPA) examination are nonqualifying education. These are personal
expenses that qualify you for a new profession.

Qualifications for Teachers

All teaching and related duties are considered the same general kind of work.
If you change duties in any of the following ways, it is not considered as a
change to a new business.

∙  Elementary school teacher to secondary school teacher.

∙  Teacher of one subject, such as biology, to teacher of another subject,
   such as art.

∙  Classroom teacher to guidance counselor.

∙  Classroom teacher to school administrator.

What Educational Expenses Are Deductible

If your education meets the requirements described earlier under Qualifying
Education, you can deduct your educational expenses if you itemize your
deductions or if you are self-employed.

Deductible expenses. Expenses of education that you can deduct include:

1)  Tuition, books, supplies, lab fees, and similar items.

2)  Certain transportation and travel costs.

3)  Other educational expenses, such as costs of research and typing when
    writing a paper as part of an educational program.

Nondeductible expenses. Educational expenses do not include personal or
capital expenses. For example, you cannot deduct the dollar value of vacation
time or annual leave you take to attend classes. This amount is a personal
expense.

Unclaimed reimbursement. If you do not claim reimbursement that you are
entitled to receive from your employer, you cannot deduct the expenses to
which that reimbursement applies. For example, your employer agrees to pay
your educational expenses if you file a voucher showing your expenses. You
do not file a voucher, and you do not get reimbursed. Because you did not
file a voucher, you cannot deduct the expenses.

Transportation Expenses

If your education qualifies, you can deduct local transportation costs of
going directly from work to school. If you are regularly employed and go
to school on a strictly temporary basis, you can also deduct the costs of
returning from school to home. A temporary basis is irregular or short-term
attendance, generally a matter of days or weeks.

If you go directly from home to school on a temporary basis, you can deduct
the round-trip costs of transportation in going from your home to school to
home. This is true regardless of the location of the school, the distance
traveled, or whether you attend school on non-work days.

Transportation expenses include the actual costs of bus, subway, cab, or other
fares, as well as the costs of using your own car. Transportation expenses do
not include amounts spent for travel, meals, or lodging while you are away
from home overnight.

Using Your Car

If you use your car for transportation to school, you can deduct your actual
expenses or use the standard mileage rate to figure the amount you can deduct.
The standard mileage rate for 1992 is 28 cents per mile. If you use this
method, you may also deduct parking fees and tolls. See Car Expenses in
Chapter 28 for information on deducting your actual expenses of using a car.

Example 1. You regularly work in Camden, New Jersey, and also attend school
every night for 3 weeks to take a course that improves your job skills. Since
you are attending school on a short-term basis, you can deduct your daily
round-trip transportation expenses in going between home and school. This
is true regardless of the distance traveled.

Example 2. Assume the same facts as in Example 1 except that on certain nights
you go directly from work to school and then home. You can deduct your
transportation expenses from your regular work site to school and then home.

Example 3. Assume the same facts as in Example 1 except that you attend the
school for 6 consecutive Saturdays, non-work days. Since you are attending
school on a short-term basis, you can deduct your round-trip transportation
expenses in going between home and school.

Example 4. Assume the same facts as in Example 1 except that you attend
classes twice a week for one year. Since your attendance in school is not
considered temporary, you cannot deduct your transportation expenses in going
between home and school. However, if you go directly to school from work,
you can deduct the transportation expenses of going from work to school.

Travel Expenses

You can deduct expenses for travel, meals, and lodging if you travel overnight
to obtain qualified education and the main purpose of the trip is to attend a
work-related course or seminar. However, you cannot deduct expenses for
personal activities, such as sightseeing, visiting, or entertaining.

If your travel away from home is mainly personal, you cannot deduct all of
your expenses for travel, meals, and lodging. However, during the time you
attend the qualified educational activities, you can deduct your expenses
for meals and lodging.

To find out whether a trip's purpose is mainly personal or mainly educational,
compare the amount of time spent on personal activities with the amount of
time spent on educational activities. If you spend more time on personal
activities, the trip is considered mainly educational only if you can show
a substantial nonpersonal reason for traveling to a particular location.

Example 1. John works in Newark, New Jersey. He traveled to Chicago to take a
deductible one-week course at the request of his employer. While there, he
took a sightseeing trip, entertained some personal friends, and took a side
trip to Pleasantville for a day. Since the trip was mainly for business,
he can deduct his round-trip airfare to Chicago, but he cannot deduct his
transportation expenses of going to Pleasantville. Only the meals and lodging
connected with his educational activities can be claimed as educational
expenses.

Example 2. Dave works in Nashville and recently traveled to California to take
a deductible 2-week seminar. While there, he spent an additional 8 weeks on
personal activities. These facts indicate that his main purpose was to take a
vacation. He cannot deduct his round-trip airfare or his meals and lodging for
the 8 weeks. He can deduct only his expenses for meals and lodging for the 2
weeks he attended the seminar.

Cruises and conventions. Certain cruises and conventions offer seminars or
courses as part of their itinerary. Even if these are work-related, your
deduction for travel may be limited. This applies to:

1)  Travel by ocean liner, cruise ship, or other form of luxury
    transportation, and

2)  Conventions outside the North American area.

The limits are the same that apply to cruises and conventions for other
business purposes. These are discussed under Luxury Water Transportation and
Conventions in Publication 463, Travel, Entertainment, and Gift Expenses.

Meal Expenses

If your educational expenses qualify for deduction, you can deduct the cost
of meals that qualify as travel expenses of education.

80% limit. You can deduct only 80% of your business-related meals that were
not reimbursed by your employer and that qualify for deduction. This includes
meals while traveling away from home to obtain your education. You must use
Form 2106 to apply the 80% limit.

If your educational expenses include expenses for travel, see Travel Expenses
in Chapter 28.

Travel as Education

You cannot deduct the cost of travel that in itself is a form of education
even though the travel may be directly related to your duties in your work
or business.

Example. You are a French language teacher. While on sabbatical leave granted
for travel, you traveled through France to improve your knowledge of the
French language. You chose your itinerary and most of your activities to
improve your French language skills. You cannot deduct your travel expenses as
educational expenses, even though you spent most of your time visiting French
schools and families, attending movies or plays, and learning French in
similar activities.

Expenses Relating to Tax-Exempt Income

Some qualified educational assistance you receive may be tax-exempt income.
This is income you receive that you are not required to report on your tax
return. The rules for determining whether any item is taxable or nontaxable
are not discussed here. See Chapter 13. Since you do not pay tax on this
income, you may not be able to deduct the related expenses. Examples of
tax-exempt income include scholarships, veterans' educational assistance,
and employee assistance plans. If you received assistance from any of these
sources, see Expenses Relating to Tax-Exempt Income in Publication 508.

How to Report Educational Expenses

Self-employed persons and employees report their educational expenses
differently.

This section explains how to deduct your expenses of qualified education. If
you are an employee, you must take into account any reimbursement you receive.
How to treat the reimbursement depends on the type of reimbursement arrangement
and the amount of the reimbursement. For information on how to report your
reimbursement, see Chapter 28.

Self-Employed Persons

Self-employed persons must report their educational expenses on the
appropriate form (Schedule C, E, or F) used to report their business income
and expenses.

For example, if you are a sole proprietor or an independent contractor, use
Schedule C. List your educational expenses for tuition, books, laboratory
fees, and similar items on line 27a of Schedule C (Form 1040) and total them
on line 27b. List your transportation and travel expenses for education on
lines 10 and 24 of Schedule C. See the instructions for the form that you
file for more information.

Employees

To deduct expenses of work-related education, you must take into account all
of the following.

∙  Your expenses must be for qualified education.

∙  You must file Form 1040.

∙  You generally must itemize your deductions on Schedule A (Form 1040).
   Your educational expenses are deducted on line 19 as a miscellaneous
   deduction. You can deduct only your expenses over 2% of adjusted gross
   income from line 32 of Form 1040.

∙  You may need to complete Form 2106 if your expenses for education include
   meal and transportation expenses or if you receive reimbursement from
   your employer.

Note.

If your adjusted gross income is more than $105,250 ($52,625 if you are
married filing separately), your deduction for itemized deductions may
be limited. See Chapter 21.

If you are a qualified performing artist, you may deduct work-related
educational expenses even if you do not itemize your deductions. See
Performing Artists in Publication 529, Miscellaneous Deductions, for
more information.

Form 2106. Whether you must report your educational expenses on Form 2106
depends primarily on the type of expense, the type of reimbursement or
allowance arrangement, and the amount of reimbursement. Reimbursement
arrangements are explained in Chapter 28.

Employee business expenses, including educational expenses, are reported on
Form 2106. Use this form to figure your allowable travel, transportation,
meal, and other work-related expenses of education. To deduct these expenses,
complete Part I of Form 2106 and enter the result on Schedule A (Form 1040)
as a miscellaneous itemized deduction. (Use Part II only if you have personal
vehicle expenses.) Part I of Form 2106 has three steps:

∙  Step 1 shows your total business expenses. Lines 1 through 3 are for
   travel and transportation expenses that are related to your qualifying
   education. Line 4 is for educational expenses such as tuition and books.
   Line 5 is for meals while traveling away from home to obtain education.

∙  Step 2 shows amounts your employer gave you (your reimbursement) for the
   expenses listed in Step 1.

∙  Step 3 figures the expenses to deduct on Schedule A (Form 1040). If your
   employer did not reimburse you for work-related meals, your deduction is
   limited to 80% of your expenses. This allowable amount is figured on
   lines 8 through 10. The allowable meal expenses are added to your other
   unreimbursed expenses and the total is entered on line 19 of Schedule A
   (Form 1040).

Exception. You do not have to complete Form 2106 if either of the following
applies:

∙  Your reimbursements not included in Box 10 of Form W─2 are at least as
   much as your deductible expenses. (Do not deduct the expenses or report
   the reimbursement as income.)

∙  You are not deducting any expenses for travel, transportation, meals,
   or entertainment, and you were not reimbursed for any expenses.
   (Unreimbursed expenses for tuition, books, and lab fees can be listed
   directly on line 19 of Schedule A of Form 1040.)

Even if you were not reimbursed, you must file Form 2106 if you are a
qualified performing artist or an individual with a disability claiming
impairment-related work expenses. See Publication 529, Miscellaneous
Deductions.

Schedule A (Form 1040). Unreimbursed educational expenses, or expenses that
are more than the amount reimbursed by your employer, are entered on line 19
of Schedule A (Form 1040). Generally, you must first use Form 2106 to compute
the amount to enter on line 19. To claim these educational expenses, you must
be able to itemize your deductions on Schedule A (Form 1040). (If you're not
sure whether you can itemize, see Chapter 20.)

You can deduct only the amount of miscellaneous deductions that is more than
2% of your adjusted gross income. This 2% limit is applied after all other
deduction limits have been applied (such as the 80% limit on meal expenses,
discussed earlier).

Recordkeeping

You must keep proof to support your claim to a deduction as long as your
income tax return can be examined. Generally, you should keep your records
for 3 years from the date of filing the return and claiming the deduction.
For specific information about keeping records of business expenses, see
Recordkeeping in Chapter 28.