Why Lori Singleton-Clarke Is My Hero and How She Can Save You Money on Your Taxes

A young women (played by Halle Berry) rises out of the ghetto against all odds due to her tremendous work ethic, intelligence, and passion for helping others to become a nurse and serve all mankind.  Our heroine’s talents and fashion sense are appreciated by the doctors and administrators she works with and she is quickly promoted up the ranks and into administration.  To better serve the hospital and its patients, she decides to earn her MBA and diligently studies at night while working full time saving lives and rescuing cute and cuddly puppies from the pound on the weekends.  Alas, when our heroine deducts the costs of her degree on her tax return, the evil bureaucracy known as the IRS (personified here by agent Tommy Lee Jones) cruelly denies her deduction.  Yet Lori is not one to back away from a fight, and, representing herself in Tax Court, her excellent documentation and brilliant explanations convince the judge of the validity of her arguments (and get agent Jones a contempt of court citation).  Since we should have a love interest, let’s say that she meets an passionate young eco-engineer (Denzel Washington) at the pound, falls in love, and lives happily ever after knowing that she has saved MBA students around the country millions in taxes.  Now, every year on April 15th, it is the custom for MBA students to visit their local watering hole and raise their glasses for their beloved Lori.

Who this helps
In order to deduct educational costs on your tax return your education must must clear one of two hurdles: either it maintains or improves skills required by the you in your employment or other trade or business, or it meets the express requirements of the your employer, or the requirements of applicable law or regulations, imposed as a condition to your retention of an established employment relationship, status, or rate of compensation.  The IRS has chosen to define this very narrowly, which is why we have the litigation. The second hurdle is the more clear-cut of the two, you have to prove that you would lose your job if you did not continue your education.  The first hurdle, the one upon which Lori based her case, is a little more open to interpretation, and the IRS hates open to interpretation.  You must have a profession or business when you start studying and your chosen field of study must complement the skill you use in this business or profession.  If you work as, let’s say, an artist and you go to law school that would be a very difficult stance to defend.  On the other hand, if you work as say, a professional personal finance blogger, and you study for a degree in finance or business administration then you have a better position to hang your hat on, with the caveat that the blog must actually make you money (i.e. you’ve paid taxes on the earnings).

How it is deducted
Educational expenses that are related to your position as an employee are deductible as miscellaneous itemized deductions and deducted on Schedule A of your tax return and subject to the 2% of adjusted-gross-income haircut (i.e. your A.G.I. times 2% must be subtracted from the total amount of tuition to be deducted.  Don’t worry, it’s on the form).  So if you don’t itemize, it may not help you anyway.  If you’re self-employed then it’s even better, you can deduct the education expenses dollar-for-dollar on the form you include your income on, usually the Schedule C.  Keep in mind that it is not only tuition that is deductible, you can also deduct transportation costs including miles driven to attend school, books and other supplies, costs of research as part of a school project, and other related expenses.

What will the IRS do?
Take a look at Publication 970, which is titled “Tax Benefits for Education,” before deciding what the best course for you will be.  On page 65 they give a number of examples as to what may or may not qualify.  Take these with a grain of salt, the IRS does not write the laws so this is their interpretation of the law, but you can get a handle on whether your circumstances qualify.  If the IRS balks then your options are rather limited.  You can take them to court, like Lori did, or you can meekly amend the return, perhaps taking advantage of another deduction, perhaps the Tuition and Fees deduction.  The best thing that you can do is take a page out of Lori’s book and come prepared, with both good records and with a good story.

Why Lori won
This is my favorite part of the story, according to the Wall Street Journal Lori won because “reached Friday by phone, Judge Goldberg said: ‘I remember the case well because Ms. Singleton-Clarke was so articulate and well-prepared. Too many taxpayers are not.’”  Lori, who remember did not hire a lawyer, read Publication 970 and presented her facts in a way that fit the criteria.  She kept good records and did everything required of her.  God willing my clients were so responsible.

Don’t forget other options
The government wants Americans to pursue higher education and so it has made a hodge-podge of different options to help them pay for it.  Get Educated has an excellent synopsis of the credits available and who qualifies for each.  You should evaluate all options before making a decision (should I say consult your tax expert?).