With the rise in popularity of online education, many people are curious whether they can claim tuition expenses for online courses as a deduction on their taxes. The answer depends on several factors, including your employment status, the type of course, and the purpose for taking it.
The General Tax Treatment of Educational Expenses
The general rule is that educational expenses are deductible if the education meets at least one of the following tests:
- It maintains or improves skills required for your job or business
- It meets the express requirements set by your employer or a law to keep your salary, status, or job
- It directly relates to your current work
However, even if it meets one of these tests, the expenses may not be deductible if the education:
- Relates to a new career or opens up a new line of work
- Is needed to meet the minimum requirements for your current line of work
- Will qualify you for a new trade or business
In other words, if the course opens up new professional opportunities or careers for you, the expenses are not deductible.
Claiming Education Expenses as Self-Employed
If you are self-employed, the rules for deducting education expenses are more flexible. Self-employed individuals can deduct educational expenses for courses that maintain or improve their skills in their trade or business. The education does not necessarily have to meet any of the tests above.
However, the IRS typically Scrutinizes self-education deductions more closely. You should be able to show how the education directly relates to or enhances your existing skills and how it serves your trade or business. Keep records explaining how each course maintains or improves your professional skills.
Claiming Education Expenses as an Employee
As an employee, you can deduct the cost of education related to your current work, even if it qualifies you for a new trade or business. However, you must be able to show that the education meets at least one of the tests above. The education must:
- Maintain or improve skills needed for your current job
- Meet express requirements set by employer or law
- Directly relate to your current duties
That means you cannot claim a deduction if the education prepares you for a new trade or business, even if you don’t intend to enter that new field.
Example
For example, if you take online courses to become a teacher or pursue an MBA, the expenses are not deductible because the education qualifies you for a new trade or profession. On the other hand, if you take a continuing education course to maintain your CPA license, the expenses are deductible because they meet the requirements for your current business.
Claiming Education Expenses for a New Career
Generally, educational expenses are not deductible if they qualify you for a new trade or business, even if you do not plan to enter that career. For example, if you pursue a law degree but do not intend to become a lawyer, the tuition is still not deductible. The purpose or use of the education does not matter in this case.
There are two exceptions if the education qualifies you for a new trade or business:
- Your current job requires you to get the education
- The education maintains or improves skills needed in your current work
An example of the first exception is if you take courses to become a teacher because your school district requires additional credentials. You may be able to deduct the educational expenses even though they qualify you for a new profession.
Claiming Education Expenses for Involuntary Career Changes
Expenses for education that qualifies you for a new trade or business are deductible if your employment situation requires you to make a career change. For example, if you lost your previous job due to economic downturn or disability, and you pursue education to enter a new field, the expenses may be deductible.
Significantly, you can only claim the deduction if you are seeking entry into a new field. If you continue studying in the same field in which you lost your previous job, the expenses are not deductible.
Substantiating Your Educational Expenses
To claim a deduction for educational expenses, you must be able to substantiate the costs. For online courses, keep records such as:
- Proof of payment for tuition and fees
- Receipts for books, supplies, and equipment
- Documentation showing the credit hours or timeframe for each course
- Description of each course and requirements
In addition, you may need to demonstrate:
- How the education maintains or improves your job skills
- How the coursework relates to your current job requirements
- Proof that a certain education level is required for your current position
The IRS may scrutinize your education deduction closely if the expenses relate to qualifying you for a new trade, profession, or business. Be prepared to explain how the education meets the deduction requirements.
Claiming the Tuition and Fees Deduction
Instead of claiming education expenses as a miscellaneous itemized deduction, you may be eligible for the tuition and fees deduction. This deduction allows you to reduce your taxable income by up to $4,000 for tuition and certain fees paid during the year.
The tuition and fees deduction has income limits. For 2023, the full $4,000 deduction is available for single filers with modified adjusted gross income below $80,000 ($160,000 joint filers). The deduction phases out for income above those thresholds.
The tuition and fees deduction cannot be claimed for any education involving sports, games, or hobbies, unless it involves your current business. Also, the deduction cannot be claimed for student activity fees, insurance, medical expenses, transportation, or similar costs.
Comparing the Tuition Deduction vs. Education Expense Deduction
If eligible for both deductions, you must choose between claiming the tuition and fees deduction or deducting the expenses directly as a miscellaneous itemized deduction. As a rule of thumb:
- The tuition and fees deduction is beneficial if it provides a greater tax benefit.
- You are better off claiming education expenses directly if they exceed $4,000.
- You should claim the tuition deduction if your total miscellaneous deductions would be limited.
Consult a tax professional to determine the optimal way to treat your educational expenses for maximum tax savings.
Claiming Education Credits
Instead of deductions, you may qualify for education tax credits such as:
- Lifetime Learning Credit – Equal to 20% of qualifying education expenses up to $10,000 per tax return. Can be claimed for any level of postsecondary education.
- American Opportunity Credit – Equal to 100% of the first $2,000 in expenses and 25% of the next $2,000 per student. Only for undergraduates.
These credits directly reduce your tax liability, while deductions simply reduce your taxable income. In most cases, taking an education credit provides more tax savings than taking a deduction.
You cannot claim an education expense as a credit and deduction in the same year. If eligible for both, compare your potential credit amount to your deduction amount and choose the more favorable option.
Can I Claim a Deduction for My Online MBA?
In most cases, you cannot claim a deduction for an online MBA program because it qualifies you for a new profession. Obtaining an MBA opens up new business and career opportunities, such as managerial positions, consulting, and teaching.
The IRS considers earning an MBA a new trade or business regardless of whether you want to start a new career. Unless your employer requires you to earn an MBA, the tuition expenses are not deductible.
Can I Deduct the Cost of My Online Medical Coding Course?
If you are already working in the medical field, you may be able to deduct the costs of an online medical coding course. The key considerations are:
- Does the course maintain or improve your skills in your current medical profession?
- Does it meet continuing education requirements?
- Is specialized coding knowledge required for your current position or duties?
If so, the tuition can qualify as a deductible job-related educational expense. Be sure to keep detailed records demonstrating the coding course relates to your current job skills and duties.
Can I Deduct My Online Real Estate Licensing Course?
Expenses for an online real estate licensing course are generally not tax deductible because completing the course qualifies you for a new trade or business (real estate agent). The tuition expenses to become licensed do not qualify as a deductible expense.
On the other hand, if you are already a licensed real estate agent, the continuing education courses required to renew your license each year can be deducted. These courses maintain or improve skills in your existing profession.
Can I Deduct an Online Tax Preparation Course?
If you are not currently a tax preparer or accountant, expenses for an online tax prep course are not deductible because the course qualifies you for a new profession. However, if you already work as a tax preparer or accountant, the course may be deductible as continuing professional education.
Can I Deduct Online Courses to Help My Side Hustle?
If you have a side business or freelance activity, online courses directly related to improving your skills in that business can be deducted as business education expenses. For example, courses in social media marketing, web development, project management, or software proficiency can qualify.
Keep detailed records showing how each course maintains or improves the skills needed for your side hustle. Business education expenses are reported as deductions on Schedule C for sole proprietors or Schedule E for rental property owners.
Claiming the Home Office Deduction
If you conduct your freelance or side business from a home office, you may qualify for the home office deduction in addition to deducting education expenses. You can deduct a portion of household expenses such as rent, utilities, insurance, repairs, and depreciation based on the percentage of your home used for business.
Bottom Line
Deducting online course expenses is allowed only if the education maintains or improves your skills in your current profession or business. Expenses that qualify you for a new trade, career, or business are not deductible. Maintain detailed records to show how the education relates to your current job duties or business activities.
For maximum tax savings if eligible, compare the potential deduction to any education credits available. Consult a tax professional to determine the optimal tax treatment of your online education expenses.