Top questions MBAs have about writing off their tuition
1. How much refund will I get if I write off my MBA Tuition?
For those that qualify to take the deduction, the average federal refund is around $15,000 to $25,000 over the three calendar years. And for those that live in a state that allows this write off, the average state refund is about $1,800/year. Keep in mind these are just averages, and your refund will depend on a wide variety of factors. The two most important variables that determine refund are your total income for the year, as well as the total amount of tuition paid that tax year.
2. What types of expenses can I write off?
All tuition and fees paid to the school as a condition of enrolment qualify. Any books, supplies, school focused equipment (e.g. computers / iPads bought specifically for school).
Things you can’t write off: living expenses, health insurance, clothing, other personal expenses not specifically detailed above.
3. How do the actual tax calculations work?
Standard Education Credits provide a 20% credit on the first $10,000 of graduate school expenses, therefore up to $2,000 of a tax credit.
Writing off the full MBA tuition works differently. Your total tuition and eligible expenses are subtracted from your total income. As an example, if you had $50,000 of income and $30,000 of tuition expenses, your taxable income decreases from $50,000 to $20,000. Your tax savings are equal to your marginal tax rate (typically 20-25%) multiplied times your tuition. In the example above, tax savings would be $7,500.
4. My tuition expenses were more than my income. How will that work?
Unused tuition expenses in excess of your income roll over to the following tax year. This type of deduction allows individuals to carry over an NOL (Net Operating Loss) from one year to the next.
5. I’m an international student, but still pay USA taxes. Does this work for me?
Absolutely. Non-resident tax returns (for non US citizens) are a bit more complicated than the standard tax return, but the same deduction rules apply to non-residents as for US citizens.
6. I took loans out to pay my tuition. Does that count?
Yes. Whether you paid out of pocket or took out loans, the IRS says you still incurred the liability. Therefore any loans you took out still qualify. For loan disbursements, you’ll need to subtract out any living expenses that may have been included, as living expenses can’t be written off as part of this deduction.
7. I didn’t write off my MBA Tuition in previous years. Can I adjust prior year returns?
Yes. You can go back and adjust prior year tax returns if you weren’t aware of this strategy until now. You can go back up to 3 tax years and amend (e.g you have until April 15, 2020 to make and adjustments to your 2016 tax year). Tuition expenses must be claimed in the year they were paid, so you may need to amend multiple prior years to reclaim full tuition write-off benefit.
8. Is this legal? What does the IRS Tax Code specifically say?
We would never recommend any tax strategy that doesn’t adhere to the Tax Code. The IRS Tax Code explicitly discusses the ability to write off education expenses. You can read for yourself exactly what the IRS tax code says here, and make your own determination on your eligibility. The IRS also discusses situations where your employer pays your tuition and how this benefit may be taxed.
9. Will I be audited as a result?
The IRS “audits” very few tax returns every year. This is largely because of a capacity issue (dealing with 300M tax returns annually). Furthermore, the IRS’ automated systems frequently catch obvious mistakes (such as forgotten W2’s, forgotten stock transactions, etc).
The IRS or affected State Tax Authorities will occasionally ask for extra documentation and evidence of your MBA deduction before they release the funds.
10. Is this risky? Will my account be red-flagged with the IRS?
No. The worst-case scenario is that the IRS rejects your education expense, and lowers your refund accordingly. There is no “watch-list” or “red-flag” list that puts you at a higher risk for future audits. Therefore there is no downside risk of at least attempting the write-off. If the IRS disallows the deduction, you’re simply in the same place you would have been without taking the larger deduction.
11. What sort of documentation or evidence may the IRS request?
The most frequently requested evidence is a copy of tuition statement(s) showing proof of payment in the calendar year. Occasionally, a letter from your employer that describes your job skills and confirms your education expenses were not reimbursed may be requested.
12. Who doesn’t qualify?
Over 90% of all MBAs at established, well-recognized institutions qualify for this deduction. However, some students’ pre-MBA experience may disqualify them. For example, if you were a practicing doctor who left that career to start a business focused career, it would be difficult to establish that the MBA enhanced your pre-MBA skills. Similarly, students who had non-business focused roles in the military might also have a difficult time tying these military skill sets with business skills. If you’re unsure whether you may qualify, contact us and we can discuss your specific situation.
13. I’m sponsored by my company that is (or will be) paying my tuition. How does that work?
Companies sponsor MBA’s in a variety of ways. Some companies make the student pay up front and reimburse the student after graduation. Other companies take care of the bills up front. Most companies, however, report the tuition as a “taxable benefit” reported on your W2. This means that you will pay income tax on the value of the tuition reimbursement paid by your company. If the tuition is reported as taxable income, the IRS does not consider this “reimbursement”, and you are still eligible to write off the cost of the tuition on your taxes, thereby eliminating any of the extra income tax bill incurred as a result of your company’s reimbursement. There are a few firms (very few) that don’t report the benefit as a taxable wage to the student. There students have zero cost nor any tax impact, therefore they are not eligible to use this deduction.
14. What’s the process, how do I get started and submit my paperwork?
File It.tax has designed simple and efficient processes for you to get us our paperwork. Simply visit our MBA registration page and we’ll get things started immediately. If you’d like to speak with one of our team specialized in MBA deductions, no problem, you can click to schedule time and speak with us at your convenience.
15. How long will it take to get my refund?
If you’re a US citizen / green card holder and are filing before October 15, your refund will likely be paid out in 7-10 business days.
If you’re not a US Citizen, the IRS requires a paper (non-electronic) tax return for all tax payers (whether you take the MBA deduction or not). The refund process normally takes between 3-6 months, sometimes less, sometimes longer.
If you’re amending a prior year tax return, the IRS also requires a paper tax return amendment. This is true for both US Citizens and non-US citizens. Refunds for paper filed prior year amended returns also takes between 3-6 months, sometimes less, sometimes longer.
16. Is my refund guaranteed by the IRS?
Nothing is guaranteed by the IRS, and your MBA tax write off is not guaranteed, even if you believe you meet all the criteria. However, after speaking with the team at File It.tax, and if we agree you meet the criteria the IRS outlines, we will guarantee your MBA deduction, otherwise we’ll refund your File It.tax filing fees. Our general acceptance rate is over 97%.