Proposed tax reform threatens deductions used by MBA students

An MBA might be getting a lot more expensive thanks to the pair of tax bills working their way through Congress, which Republican leadership aims to have on the president’s desk before Christmas.

Recent coverage of the House bill has provided an oversimplified explanation of its implications on graduate students without explaining who might fall into this category. Ph.D. students, and other graduate students who receive tuition waivers, are in much more dire straits than MBA students; the new House bill would count tuition waivers as income, which would therefore be subject to income tax.

Although this provision in the House bill does not impact MBA students, we are not completely out of the crosshairs.

On November 16, the House of Representatives voted to pass the Tax Cuts and Jobs Act of 2017, the largest tax overhaul since the Reagan administration, without holding a single hearing and despite objections from both Republicans and Democrats. That same day, the Senate Finance Committee voted 14-12 along party lines to advance their version of the bill for the full Senate to consider after the Thanksgiving recess.

Buried in the over 400-page legislation is the elimination of a provision critical to MBA students: Sec. 1312. “Denial of deduction for expenses attributable to the trade or business of being an employee,” also known as the miscellaneous itemized deduction for work-related education. According to a summary of the provision prepared by the majority tax staff of the Ways and Means Committee, “…a taxpayer would not be allowed an itemized deduction for expenses attributable to the trade or business of performing services as an employee.” The Senate bill contains a similar provision, though it has not yet been considered by the full chamber.

Under current law, this deduction allows individuals to deduct the amount of tuition greater than 2 percent of the student’s adjusted gross income for the year as long as the individual meets all three eligibility requirements to qualify for the deduction:

1) Either a) the education is required by the individual’s employer or by law for the individual to keep his or her job, status, or salary; or b) the education maintains or improves the skills needed in the individual’s current job.

2) The education is not needed to meet the minimum educational requirements for the individual’s current trade or business.

3) The education is not part of a program of study that qualifies the individual for a new trade or business.

If the education expense qualifies, students can deduct the tuition, supplies, books, research, and certain transportation and travel costs related to the education.

Other than no longer being able to deduct MBA tuition as an itemized deduction, what does this proposed provision mean for your wallet? Consider this example from William Perez, a senior tax accountant at Visor:

“Caroline earns $100,000 in salary, and paid $45,000 in tuition last year. Her federal income tax liability without the work-related education deduction was $18,738. But with the work-related education deduction, her federal income tax liability is $12,844. In other words, the work-related education deduction reduced her federal tax liability by $5,894.”

Under the Tax Cuts and Jobs Act of 2017, self-employed students would still be able to claim the work-related education deduction.

Members of the majority tax staff justify eliminating this deduction in two ways. First, they claim that with the increased standard deduction and lower overall tax rates, eliminating the deduction simplifies the tax code. Second, they claim that maintaining the records of these expenses is an onerous task for taxpayers and are difficult for the IRS to enforce. In other words, the provision would simplify the tax code, a key talking point from the administration, and it is difficult for the IRS to determine if these expenses are legitimate, particularly because individuals do not reliably maintain their records to substantiate a legitimate deduction.

The House bill also takes aim at four other education-related programs that may impact MBA students.

As reported by Poets & Quants, the bill proposes to eliminate:

1) The deduction for student loan interest, which under current law is an above-the-line-deduction of up to $2,500;

2) Tuition and fees deduction, which under current law is an above-the-line-deduction of up to $4,000 for undergraduate or graduate tuition;

3) Lifetime learning credit, which under current law is a tax credit of up to $2,000 for undergraduate or graduate tuition; and

4) Education assistance programs, which are offered as benefit by some employers and provide up to $5,250 tax free toward an employee’s tuition.

Not everything about the House’s tax bill is negative—MBA students may benefit from the proposed modification of the American Opportunity Tax Credit. Under current law, an individual can receive an annual credit of $2,500 toward qualified education expenses for the first four years of post-secondary education. The House bill proposes extending the American Opportunity Tax Credit toward qualified education expenses, making $1,250 available for the fifth year of post-secondary education.

So, what’s the bottom line? The tax bills making their way through Congress might make the cost of getting an MBA increase, and they might eliminate other higher education deductions and tax credits on which students may rely to reduce their tuition burden. But, both tax bills would impact tax years after 2017, meaning students can take advantage of current law for their 2017 taxes.

Students should consult their tax professional to determine how these bills, if they become law, will impact their unique tax situation.

Despite the appetite among Republicans to quickly push a tax bill through the legislative process (in an effort to notch a win before heading into the 2018 midterm elections), a lot needs to happen after Thanksgiving recess and before President Trump signs tax reform into law. One of the biggest pressures they must contend with is the need to fund the government past December 8 to avoid a government shutdown—and there are not many legislative days left this year for Republicans to navigate past any potential setbacks.

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