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"Education Expense"
Education Expense
Carlos Hernandez

Article: Education Expense—An Investment for a Lifetime

Author: Pamela K. Revak, J.D., LL.M.

Journal: The Tax Magazine, June 2002

This article reviews the deductibility of education expenses and the court decisions on certain cases. The article also introduces indirect deductions of education expenses as introduced in the Hope and Lifetime Learning Credits.

In order for education expenses to be deductible, the expense should be expenses rather than personal investments. The difference between investment and expense are further explained. Educational expenses used to acquire minimum skills for a particular profession are viewed as an investment in personal capital. Education expenses, though, that occur in the practice of the taxpayer's existing profession are deductible because the personal capital investment has already been made. Further, T.M. Malek, 50 TCM 792, Dec. 42, 318(M), TC Memo. 1985-428 states that it is near impossible to deduct the expenses incurred in attaining a bachelor's degree, since the degree usually qualifies the taxpayer for a new trade or business.

Courts have implemented the "common sense" approach in interpreting whether or not the taxpayer has qualified for a new trade or business. In this approach, the court compares the tasks the taxpayer performed before and after the education. The deduction will be disallowed if there is a substantial difference between the tasks performed. The general rule is new skill set, new capital, no deduction; old skill set, old capital, deduction.

The examples of court cases revolved mainly around teachers and their claimed deductions. Regulations give examples of change in duties that are not considered new trades. The regulations do not allow the deductions of education expenses that result from advancing to a higher teaching status, such as elementary or secondary teacher advancing to college professor. Furthermore court cases have drawn a distinction about teaching, which states' teaching is teaching is teaching as long as...

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