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The Deduction on Job Related Education

  Sanjiv Gupta CPA  Published 
The Deduction on Job Related Education

During the 80s and early 90s, there was a long-term decline in real average earnings of many US workers. There was also a trade deficit and reductions in manufacturing employment growth. All of these have become public concerns. The notion that was brought about this situation is that there are required job training and education in order for the workforce to improve the economic status. There is also a competitive position in the global market place that has to be met.

The quality of the US workforce matters right now more than ever. Workers have to be motivated and well trained in order for them to produce high-quality services and goods at quite a low cost. This can definitely help enhance competitiveness and industrial productivity and also keep the American living standards at a high quality. Today’s international economy requires workers to be prepared and also change the way they approach and do their jobs so that they can capture the benefits from the technology that rapidly evolves. Training goes hand-in-hand with quality, automation, productivity and flexibility in the best performing firms.

Individuals can deduct the educational expenses that they have paid for, even if this training or further studies have led to an MBA or a post-bachelor degree. However, the deduction may be large so there are rules that are still subject to interpretations. The IRS is aware of this situation so it has increased the number of audits in this department.

America is facing a major crisis when it comes to education. There is a large and more significant dilemma and it has been quite apparent recently. Americans must understand the scientific and mathematical principles that can be applied to their everyday problems when it comes to the executive suite and the factory floor. It is also required that Americans who can read and understand the complex technical material must use the knowledge that they acquire in order to perform new tasks.  It is also preferred that more Americans can work individually and in teams and identify and solve problems without relying on the direct supervision or rigid rules of the company. What is also required are more Americans who can converse in foreign languages and then be cognizant of the events that are beyond borders. What is required are Americans who can live and also work effectively with people who come from diverse backgrounds and cultures.

This may seem a bad reflection of the current US educational system but the truth of the matter is that there is an improvement in the education and training of workers. There are some general views that have been expounded regarding the relationship of education alongside earnings and how it can also improve the job training systems.

The Most Tax-Advantaged Ways to Reimburse Job-Related Education Expenses

 Reimbursing the employees for the expenses for their education strengthens the capabilities of the workforce. It also retains them and makes them loyal to the company. Aside from this, the employer and the employees save valuable tax dollars. However, it is very important to follow IRS rules. Here are some options to maximize savings when reimbursing job-related education expenses.

A fringe benefit

 Qualifying the reimbursements along with direct payments from job-related education costs are excluded from the employee’s wages. This is called the working condition fringe benefits. It also means that employees do not have to pay tax. This can also deduct costs and make it appear as employee education expenses. There is no need to withhold the payroll taxes as well as the income tax.

To qualify as a working condition and fringe benefit, the education costs must also be the expenses that the employees were allowed to deduct and file as a business expense if this has been paid directly and were not reimbursed. In a nutshell, this means that education should be connected to the current profession of the employee. They should also not qualify themselves for another profession. There is no ceiling on the amount that the employees can receive tax-free as the working condition of the fringe benefit.

An educational assistance program

 This is another approach that is used to establish a formal educational assistance program. This covers the job-related and non-related training for the individuals. The reimbursements include the expenses for:

  • Fees
  • Equipment and supplies
  • Books
  • Tuition for undergraduate or graduate level

The reimbursement of materials that employees can maintain after the completion of their classes (except for books) is not eligible.

It is also possible for the individuals to annually exclude this from the income of the employee and deduct a maximum of $5,250. This can also be an unlimited amount of training or higher education is connected to the profession. Other eligible education reimbursements come in the form of the employee benefit expense. They also do not have to withhold their income tax or withhold their taxes from their payroll on these kinds of reimbursements.

Train and Retain

 If the business has employees who wish to take their skills for the job toward the next level, employers must think before they even decide to go to their competitor. When they reimburse their education costs then these turn out to be a fringe benefit and are also set up as the educational assistance program. Employers then keep their staff trained and constantly evolving toward a better future which would let them also save lots from taxes.

In order for the individual to qualify, there are three requirements that must be met:

 The individual’s training and education are maintained and improve the skills for the job. If the individual has worked in one industry before and after he or she has entered graduate school, then the purpose of the study is for the individual to further work on his or her profession. The MBA must be related to the previous occupation. Another scenario is when the education and further training is required by the employer, as stated by the law and the regulations, in order for the individual to keep his or her job, status, and present salary. The latter situation has higher chances of getting a deduction.

 The education or further studies must not be required in order to obtain the minimum requirements for a specific business niche or trade. In order for an individual to become a doctor, he or she must attend medical school. For one to pursue becoming a layer, he or she must enroll in law school. These occupations do not deduct the education cost as a form of business expense because it is a minimum requirement. On the other hand, the individual can work in finance or management without an advanced degree. Expenses on this field could definitely qualify especially if he or she is pursuing an MBA degree.

 The education or further studies must not qualify the individual for another business, trade or job. If he or she has limited business and managerial duties in his or her profession before pursuing an MBA, then the MBA should not be used as a way to qualify for another business or trade. Obviously, this would not be considered a deductible. Employers should also be mindful of the change of duties somehow involved in a similar kind of occupation. This is not considered a new business or trade. However, there are also IRS officers that focus on the said specific rule so that they can try and also not allow these deductions for the expenses targeted for higher education.

 What if the Individual is not Audited?

 If the individual is not audited, then it is likely that the IRS is currently questioning whether he or she a) is still in the trade or business if time off from school was taken, b) the education that the individual is taking is indeed giving him qualification for another business or trade and c) the education and further training has truly improved the skills in that specific or business that the individual has entered for graduate school. If these are the cases then these should be regarded as personal enrichment and therefore, not a deductible. For that last item listed, they should also be looked into if the coursework that they are taken is indeed directly related to the business.