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Businessweek: The IRS Just Won a Tuition-Deduction Case Against an MBA. Are You Next?

Last week, the U.S. Tax Court ruled that a Rollins College MBA named Adam Hart owes the U.S. Internal Revenue Service more than $2,500 in back taxes after he improperly deducted more than $17,000 in tuition expenses from his 2009 tax return. Accountants says that it’s unusual for the IRS to challenge tuition deductions. Still, if you’re an MBA thinking about getting creative with your taxes, you’ll want to take note of a case that could embolden the IRS to go after more students.

The rules for deducting educational expenses sound simple enough: Tuition is deductible when it pays for coursework that enhances skills necessary for an established job or business, as well as any courses required by an employer. That’s about it. What doesn’t make the grade? Enrolling in business school because you’re in the market for a career switch or because you think a mastery of data analysis is going to make you a more complete person.

Even simple rules can get sticky. Does an investment banking analyst who leaves Wall Street for business school after two years to further her career qualify as having an established trade? Is a tax accountant who attends to b-school to become a chief financial officer pursuing a new career or furthering an existing one? “There isn’t a bright line distinction that says, if you’ve worked so many years, making a certain salary, you can claim the deduction,” says David Young, a partner at Young and Co. in Rochester, N.Y.   (read more)

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