Publication 508

Cat. No. 15012M Contents

Department Important Changes for 2002 ......... 1

of the Tax Benefits for Important Reminder ............... 2 Treasury

Internal Introduction ..................... 2

Revenue

Service

Work-Related Qualifying Work-Related

Education ................... 2

Education Education Required by Employer

or by Law . . . . . . . . . . . . . . . . . 2

Education To Maintain or

Improve Skills .............. 2

For use in preparing Education To Meet Minimum

Requirements .............. 3

2002 Returns Education That Qualifies You

for a New Trade or Business .... 4

What Educational Expenses Are

Deductible as Business

Expenses? ................... 4

Transportation Expenses .......... 4

Travel Expenses ............... 5

Expenses Relating to

Tax-Exempt and Excluded

Income ................... 5

How To Treat Reimbursements ....... 6

Accountable Plans .............. 6

Nonaccountable Plans ........... 6

Where To Deduct Expenses ....... 6

Employer-Provided Educational

Assistance ................... 7

Recordkeeping .................. 7

Illustrated Example Using Form

2106–EZ .................... 7

How To Get Tax Help .............. 9

Index .......................... 10

Important Changes for

2002

Standard mileage rate. Generally, if you

drive your car to and from school, you can deduct 361

/2 cents per mile. See Transportation

Expenses under What Educational Expenses

Are Deductible.

Limit on itemized deductions. If your adjusted gross income for 2002 is more than

$137,300 ($68,650 if you are married filing separately), your itemized deductions may be limited. See the instructions for line 28 of Schedule

A (Form 1040).

Employer-provided educational assistance

program extended. The tax-free status of up

to $5,250 of employer-provided educational assistance benefits each year has been extended

through 2010. Beginning in 2002, it applies to

both undergraduate- and graduate-level

courses.
dent loan. For information about these and other However, even if the education meets one or

tax benefits for education, see Publication 970. both of the above tests, it is not qualifying Important Reminder work-related education if it: When you figure your taxes, you may

Photographs of missing children. The Inter- want to compare these tax benefits so 1) Is needed to meet the minimum educa- nal Revenue Service is a proud partner with the you can choose the method(s) that

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tional requirements of your present trade National Center for Missing and Exploited Chil- give you the lowest tax liability. First, figure your or business, or dren. Photographs of missing children selected taxes using the expenses as business deducby the Center may appear in this publication on 2) Is part of a program of study that will qual- tions. Then, figure your taxes again using only

pages that would otherwise be blank. You can ify you for a new trade or business. the expenses that qualify for a Hope or lifetime

help bring these children home by looking at the learning credit. Or you may find that a combina- You can deduct the costs of qualifying photographs and calling 1–800–THE–LOST tion of credit(s) and deduction(s) gives you the work-related education as a business expense (1–800–843–5678) if you recognize a child. lowest tax. even if the education could lead to a degree.

You can use Figure A (see next page) as a

quick check to see if your education qualifies.

Comments and suggestions. We welcome Introduction your comments about this publication and your Education Required by This publication discusses work-related educa- suggestions for future editions. Employer or by Law tional expenses that you may be able to deduct You can e-mail us while visiting our web site as business expenses. It also discusses the at www.irs.gov. Once you have met the minimum educational exclusion from income of employer-provided ed- You can write to us at the following address: requirements for your job, your employer or the ucational assistance benefits. law may require you to get more education. This To be able to deduct work-related educa- additional education is qualifying education if all Internal Revenue Service tional expenses as business expenses, you three of the following requirements are met.

must: Tax Forms and Publications

W:CAR:MP:FP 1) It is required for you to keep your present 1) Be working, 1111 Constitution Ave. NW salary, status, or job, Washington, DC 20224 2) Itemize your deductions on Schedule A 2) The requirement serves a business pur- (Form 1040) if you are an employee, pose of your employer, and We respond to many letters by telephone. 3) File Schedule C (Form 1040) or Schedule 3) The education is not part of a program that Therefore, it would be helpful if you would in- F (Form 1040) if you are self-employed, will qualify you for a new trade or busi- clude your daytime phone number, including the and ness. area code, in your correspondence. 4) Have expenses for education that meet When you get more education than your em- the requirements discussed under Qualify- Useful Items ployer or the law requires, the additional educa- ing Work-Related Education. You may want to see: tion can be qualifying education only if it

Your work-related educational expenses maintains or improves skills required in your

may also qualify you for other tax benefits, such Publication present work. See Education To Maintain or

as the tuition and fees deduction and the Hope Improve Skills, below. ❏ 463 Travel, Entertainment, Gift, and lifetime learning credits. You may qualify for and Car Expenses Example. You are a teacher who has satis- these other benefits even if you do not meet the

❏ 520 Scholarships and Fellowships fied the minimum requirements for teaching. requirements listed above.

Also, keep in mind that your work-related Your employer requires you to take an additional ❏ 535 Business Expenses educational expenses may qualify you to claim college course each year to keep your teaching

more than one tax benefit. Generally, you may ❏ 970 Tax Benefits for Education job. If the courses will not qualify you for a new

claim any number of benefits as long as you use trade or business, they are qualifying education

different expenses to figure each one. Form (and Instructions) even if you eventually receive a master’s degree

and an increase in salary because of this extra ❏ 2106 Employee Business Expenses Tuition and fees deduction. Because this education.

deduction is an adjustment to income, you can ❏ 2106–EZ Unreimbursed Employee

claim it even if you do not itemize deductions on Business Expenses Education To Maintain

Schedule A (Form 1040). You can deduct the ❏ Schedule A (Form 1040) Itemized or Improve Skills tuition and fees you pay that are required for Deductions higher education courses, possibly decreasing If your education is not required by your em- your 2002 taxable income by up to $3,000. How- See How To Get Tax Help, near the end of ployer or the law, it can be qualifying work-re- ever, you cannot qualify for this deduction if your this publication, for information about getting lated education only if it maintains or improves income is more than $65,000 ($130,000 for joint these publications and forms. skills needed in your present work. This could returns). See chapter 4 of Publication 970, Tax include refresher courses, courses on current Benefits for Education, for more information. developments, and academic or vocational

courses. Hope and lifetime learning credits.

education credits may be available for tuition

These Qualifying Example. You repair televisions, radios, and related expenses you pay for higher educa- Work-Related and stereo systems for XYZ Store. To keep up tion. Generally, credits are more beneficial than with the latest changes, you take special deductions because they reduce your tax rather Education courses in radio and stereo service. These than your taxable income. The Hope credit could courses maintain and improve skills required in reduce your tax by up to $1,500 in 2002, and the You can deduct the costs of qualifying work-re- your work. lifetime learning credit by $1,000. You will not lated education as business expenses. This is qualify for either of these credits if your income is education that meets at least one of the follow- Maintaining skills vs. qualifying for new job. more than $51,000 ($102,000 for joint returns). ing two tests. Education to maintain or improve skills needed For more information, see chapters 1 and 2 of in your present work is not qualifying education if Publication 970. 1) The education is required by your em- it will also qualify you for a new trade or busiployer or the law to keep your present ness. Other tax benefits for education. In addition salary, status, or job. The required educa- to the tax benefits that are available for your Temporary absence. If you stop working tion must serve a bona fide business pur- work-related educational expenses, there are for a year or less in order to get education to pose of your employer. benefits for educational expenses that are not maintain or improve skills needed in your preswork related, such as your child’s college tuition ent work and then return to the same general 2) The education maintains or improves

and fees and the interest on your qualified stu- type of work, your absence is considered tempo- skills needed in your present work.

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The requirement is the college degree or the

minimum number of college hours usually required of a person hired for that position.

If there are no requirements, you will have

met the minimum educational requirements

when you become a faculty member. You generally will be considered a faculty member when

one or more of the following occurs. 

1) You have tenure.

2) Your years of service count toward obtaining tenure.

3) You have a vote in faculty decisions.

4) Your school makes contributions for you to

a retirement plan other than social security

or a similar program.

Example 1. The law in your state requires

beginning secondary school teachers to have a

bachelor’s degree, including 10 professional education courses. In addition, to keep the job, a

teacher must complete a fifth year of training

within 10 years from the date of hire. If the

employing school certifies to the state Department of Education that qualified teachers cannot

be found, the school can hire persons with only 3

years of college. However, to keep their jobs,

these teachers must get a bachelor’s degree

and the required professional education courses

within 3 years.

Under these facts, the bachelor’s degree,

whether or not it includes the 10 professional

education courses, is considered the minimum

educational requirement for qualification as a

teacher in your state.

If you have all the required education except

the fifth year, you have met the minimum educational requirements. The fifth year of training is

qualifying education unless it is part of a proFigure A. Does Your Work-Related Education Qualify?

Start Here

Yes

Is the education required

by your employer or the

law to keep your present

salary, status, or job?

Does the requirement

serve a bona fide

business requirement of

your employer?

Is the education needed to meet

the minimum educational

requirements of your present

trade or business?

Is the education part of a

program of study that will

qualify you for a new

trade or business?

Does the education

maintain or improve skills

needed in your present

work?

Your education is not

qualifying work-related

education.



No



No





No

Yes

Yes

No



Yes



Yes



Your education is

qualifying work-related

education.





No



gram of study that will qualify you for a new trade

rary. Education that you get during a temporary minimum educational requirements. This means or business.

absence is qualifying education if it maintains or that if the minimum requirements change after

improves skills needed in your present work. you were hired, any education you need to meet Example 2. Assume the same facts as in

the new requirements can be qualifying educa- Example 1 except that you have a bachelor’s

Example. You quit your biology research tion. degree and only six professional education

job to become a full-time biology graduate stu- courses. The additional four education courses You have not necessarily met the mini- dent for one year. If you return to work in biology can be qualifying education. Although you do mum educational requirements of your research after completing the courses, the edu- not have all the required courses, you have CAUTION trade or business simply because you

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cation is related to your present work even if you already met the minimum educational require- are already doing the work. do not go back to work with the same employer. ments.

Indefinite absence. If you stop work for Example 3. Assume the same facts as in more than a year, your absence from your job is Example 1. You are a full-time engineering Example 1 except that you are hired with only 3 considered indefinite. Education during an in- student. Although you have not received your years of college. The courses you take that lead definite absence, even if it maintains or im- degree or certification, you work part time as an to a bachelor’s degree (including those in edu- proves skills needed in the work from which you engineer for a firm that will employ you as a cation) are not qualifying education. They are are absent, is considered to qualify you for a full-time engineer after you finish college. Al- needed to meet the minimum educational renew trade or business. Therefore, it is not quali- though your college engineering courses im- quirements for employment as a teacher. fying education. prove your skills in your present job, they are

also needed to meet the minimum job require- Example 4. You have a bachelor’s degree

Education To Meet ments for a full-time engineer. The education is and you work as a temporary instructor at a

Minimum Requirements not qualifying education. university. At the same time, you take graduate

courses toward an advanced degree. The rules

Education you need to meet the minimum edu- Example 2. You are an accountant and you of the university state that you can become a

cational requirements for your present trade or have met the minimum educational require- faculty member only if you get a graduate debusiness is not qualifying work-related educa- ments of your employer. Your employer later gree. Also, you can keep your job as an instrucchanges the minimum educational requirements tor only as long as you show satisfactory tion. The minimum educational requirements

are determined by: and requires you to take college courses to keep progress toward getting this degree. You have

your job. These additional courses can be quali- not met the minimum educational requirements

1) Laws and regulations, fying education because you have already satis- to qualify you as a faculty member. The gradufied the minimum requirements that were in ate courses are not qualifying education. 2) Standards of your profession, trade, or effect when you were hired. business, and Certification in a new state. Once you have

met the minimum educational requirements for 3) Your employer. Requirements for Teachers teachers for your state, you are considered to

Once you have met the minimum educa- have met the minimum educational requiretional requirements that were in effect when you States or school districts usually set the mini- ments in all states. This is true even if you must

were hired, you do not have to meet any new mum educational requirements for teachers. get additional education to be certified in anPage 3
other state. Any additional education you need 3) Classroom teacher to guidance counselor. not be treated as temporary after the date you

is qualifying education. You have already met determine it will last more than 1 year. 4) Classroom teacher to school administrator. the minimum requirements for teaching. Teach- Attendance at school on a temporary ing in another state is not a new trade or busi- basis was formerly defined as attend- ness. ance on an irregular or short-term ba- CAUTION

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sis (generally a matter of days or weeks). Example. You hold a permanent teaching What Educational

certificate in State A and are employed as a

teacher in that state for several years. You move Expenses Are You can file an amended return on to State B and are promptly hired as a teacher. Deductible as Form 1040X, Amended U.S. Individual You are required, however, to complete certain Income Tax Return, for any year in

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prescribed courses to get a permanent teaching Business Expenses? which you used the former definition of attend- certificate in State B. These additional courses ance on a temporary basis. However, you gen- are qualifying education because the teaching erally must file the amended return within 3 position in State B involves the same general If your education meets the requirements de- years from the time you filed the original return kind of work for which you were qualified in State scribed earlier under Qualifying Work-Related or within 2 years from the time you paid the tax, A. Education, you can generally deduct your edu- whichever is later. cational expenses as business expenses. If you

Education That are not self-employed, you can deduct business

expenses only if you itemize your deductions. Qualifies You for a You cannot deduct expenses related to Deductible expenses. If you are regularly New Trade or Business tax-exempt and excluded income. employed and go directly from home to school

on a temporary basis, you can deduct the Education that is part of a program of study that Deductible expenses. The following educa- round-trip costs of transportation between your will qualify you for a new trade or business is not tional expenses can be deducted. home and school. This is true regardless of the qualifying work-related education. This is true location of the school, the distance traveled, or even if you do not plan to enter that trade or 1) Tuition, books, supplies, lab fees, and sim- whether you attend school on nonwork days. business. ilar items. Transportation expenses include the actual If you are an employee, a change of duties 2) Certain transportation and travel costs. costs of bus, subway, cab, or other fares, as well that involves the same general kind of work is as the costs of using your car. Transportation 3) Other educational expenses, such as not a new trade or business. expenses do not include amounts spent for costs of research and typing when writing travel, meals, or lodging while you are away Example 1. You are an accountant. Your a paper as part of an educational program. from home overnight. employer requires you to get a law degree at

your own expense. You register at a law school Nondeductible expenses. Educational ex- Example 1. You regularly work in Camden, for the regular curriculum that leads to a law penses do not include personal or capital ex- New Jersey, and go directly from work to home. degree. Even if you do not intend to become a penses. For example, you cannot deduct the You also attend school every work night for 3 lawyer, the education is not qualifying because dollar value of vacation time or annual leave you months to take a course that improves your job the law degree will qualify you for a new trade or take to attend classes. This amount is a per- skills. Since you are attending school on a tem- business. sonal expense. porary basis, you can deduct your daily

round-trip transportation expenses in going be- Example 2. You are a general practitioner Unclaimed reimbursement. If you do not tween home and school. This is true regardless claim reimbursement that you are entitled to of medicine. You take a 2-week course to review of the distance traveled. receive from your employer, you cannot deduct developments in several specialized fields of

medicine. The course does not qualify you for a the expenses that apply to the reimbursement. Example 2. Assume the same facts as in

new profession. It is qualifying education be- Example 1 except that on certain nights you go Example. Your employer agrees to pay cause it maintains or improves skills required in directly from work to school and then home. You your educational expenses if you file a voucher your present profession. can deduct your transportation expenses from showing your expenses. You do not file a your regular work site to school and then home. Example 3. While working in the private voucher and you do not get reimbursed. Because you did not file a voucher, you cannot practice of psychiatry, you enter a program to Example 3. Assume the same facts as in deduct the expenses on your tax return. study and train at an accredited psychoanalytic Example 1 except that you attend the school for institute. The program will lead to qualifying you 9 months on Saturdays, nonwork days. Since to practice psychoanalysis. The psychoanalytic Transportation Expenses you are attending school on a temporary basis, training does not qualify you for a new profes- you can deduct your round-trip transportation sion. It is qualifying education because it main- If your education qualifies, you can deduct local expenses in going between home and school. tains or improves skills required in your present transportation costs of going directly from work

profession. to school. If you are regularly employed and go Example 4. Assume the same facts as in to school on a temporary basis, you can also Example 1 except that you attend classes twice deduct the costs of returning from school to a week for 15 months. Since your attendance in Bar or CPA Review Course home. school is not considered temporary, you cannot

deduct your transportation expenses in going Review courses to prepare for the bar examina- Temporary basis. If your attendance at between home and school. If you go directly tion or the certified public accountant (CPA) ex- school is realistically expected to last (and does from work to school, you can deduct the amination are not qualifying education. They are in fact last) for 1 year or less, you go to school on one-way transportation expenses of going from part of a program of study that can qualify you a temporary basis (unless there are facts and work to school. If you go from work to home to for a new profession. circumstances that would indicate otherwise). school and return home, your transportation ex- If your attendance at school is realistically penses cannot be more than if you had gone expected to last for more than 1 year or if there is directly from work to school. Teaching and Related Duties no realistic expectation that the attendance will

last for 1 year or less, the attendance is not Using your car. If you use your car All teaching and related duties are considered temporary, regardless of whether it actually lasts (whether you own or lease it) for transportation the same general kind of work. A change in for more than 1 year. to school, you can deduct your actual expenses duties in any of the following ways is not consid- If your attendance at school initially is realis- or use the standard mileage rate to figure the ered a change to a new business. tically expected to last for 1 year or less, but at amount you can deduct. The standard mileage

some later date the attendance is realistically rate for 2002 is 361/2 cents per mile. Whichever 1) Elementary school teacher to secondary expected to last more than 1 year, that attend- method you use, you can also deduct parking school teacher. ance will be treated as temporary (unless there fees and tolls. See Publication 463 for informa2) Teacher of one subject, such as biology, to are facts and circumstances that would indicate tion on deducting your actual expenses of using

teacher of another subject, such as art. otherwise) until your expectation changes. It will a car.

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Travel Expenses Cruises and conventions. Certain cruises Example. Your total tuition is $8,000. The

and conventions offer seminars or courses as tuition for the courses that are qualifying educaYou can deduct expenses for travel, meals (see part of their itinerary. Even if the seminars or tion is $3,200. Your tax-exempt scholarship is

50% limit on meals, later), and lodging if: courses are work related, your deduction for $6,000. To determine the part of the scholarship

travel may be limited. This applies to: that must be subtracted from the cost of your

1) You travel overnight to obtain qualified ed- qualifying education, multiply the scholarship

ucation, and 1) Travel by ocean liner, cruise ship, or other ($6,000) by a fraction. The numerator (top num- form of luxury water transportation, and ber) of the fraction is the tuition for qualifying 2) The main purpose of the trip is to attend a

2) Conventions outside the North American education ($3,200), and the denominator (bot- work-related course or seminar. area. tom number) is the total tuition ($8,000).

Travel expenses for qualifying work-related

education are treated the same as travel ex- For a discussion of the limits on travel ex- $3,200 $6,000 × = $2,400 penses for other employee business purposes. pense deductions that apply to cruises and con- $8,000

For more information, see Publication 463. ventions, see Luxury Water Travel and The result, $2,400, is the amount of the scholar- Conventions in Publication 463. You cannot deduct expenses for per- ship you must subtract from the cost of your

sonal activities such as sightseeing, 50% limit on meals. You can deduct only qualifying education. You can include only $800

visiting, or entertaining. 50% of the cost of your meals while traveling ($3,200 − $2,400) as deductible educational ex- CAUTION

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away from home to obtain qualifying education. penses.

You cannot have been reimbursed for the

meals. More information. For more information on

Mainly personal travel. If your travel away scholarships, see Publication 520. Employees must use Form 2106 or Form from home is mainly personal, you cannot de- 2106–EZ to apply the 50% limit. duct all of your expenses for travel, meals, and

lodging. You can deduct only your expenses for Veterans

lodging and 50% of your expenses for meals Travel as Education Any educational assistance payment you re- during the time you attend the qualified educa- ceive from the Department of Veterans Affairs tional activities. You cannot deduct the cost of travel as a form of

(VA) is tax exempt. This includes payments for Whether a trip’s purpose is mainly personal education even if it is directly related to your living expenses. or educational depends upon the facts and cir- duties in your work or business.

cumstances. An important factor is the compari- VA programs that pay educational expenses son of time spent on personal activities with time Example. You are a French language only. If you receive payments under a VA pro- spent on educational activities. If you spend teacher. While on sabbatical leave granted for gram that pays only for educational expenses, more time on personal activities, the trip is con- travel, you traveled through France to improve such as tuition, books, and similar expenses, sidered mainly educational only if you can show your knowledge of the French language. You you must subtract the part of the VA payment a substantial nonpersonal reason for traveling to chose your itinerary and most of your activities that applies to qualifying education from the cost a particular location. to improve your French language skills. You of your qualifying education. cannot deduct your travel expenses as educaExample 1. John works in Newark, New tional expenses. This is true even if you spent Example. Your tuition is $1,000 and all clasJersey. He traveled to Chicago to take a deducti- most of your time learning French by visiting ses are qualifying education. You receive a ble 1-week course at the request of his em- French schools and families, attending movies $780 educational assistance payment from the ployer. His main reason for going to Chicago or plays, and engaging in similar activities. VA that is solely for educational expenses. You was to take the course. can include only $220 ($1,000 − $780) as deWhile there, he took a sightseeing trip, enter- Expenses Relating to ductible educational expenses.

tained some friends, and took a side trip to Tax-Exempt and VA programs that pay living expenses and Pleasantville for a day. Excluded Income educational expenses. If you receive pay- Since the trip was mainly for business, he ments under a VA program that pays for both can deduct his round-trip airfare to Chicago. He The following discussions explain how to treat living expenses and educational expenses, you cannot deduct his transportation expenses of the costs of qualifying education that are related must subtract from the cost of your qualifying going to Pleasantville. He can deduct only the

meals (subject to the 50% limit) and lodging to tax-exempt or excluded income from scholar- education only the part of the VA payment that ships, veterans’ educational assistance, and the applies to educational expenses for qualifying connected with his educational activities. Education Savings Bond Program. education.

Generally, 50% of the VA payments are for Example 2. Sue works in Boston. She went

subsistence or living expenses. For married vet- to a university in Michigan to take a course for

work. The course is qualifying education. Scholarships erans, the percentage is higher.

She took one course, which is one-fourth of a If you receive a tax-exempt scholarship, you Example. Your tuition is $1,000 and all clas- full course load of study. She spent the rest of must subtract the amount of the scholarship ses are qualifying education. You receive a the time on personal activities. Her reasons for from the cost of your qualifying education. $780 educational assistance payment from the taking the course in Michigan were all personal. VA. Under this program, $390 of the payment is Her trip is mainly personal because Example. Your tuition for qualifying educa- for living expenses and $390 is for educational three-fourths of her time is considered personal tion is $8,000. You receive a tax-exempt schol- expenses. You can include only $610 ($1,000 − time. She cannot deduct the cost of her arship of $6,000 to help pay the tuition. You can $390) as deductible educational expenses. round-trip train ticket to Michigan. She can de- include only $2,000 ($8,000 – $6,000) as deduct one-fourth of the meals (subject to the 50% ductible educational expenses. VA payments used for both qualifying and

limit) and lodging costs for the time she attended other education. If you use a VA payment for Part of scholarship is tax exempt. If only the university. educational expenses to pay for both qualifying part of your scholarship is tax exempt, you sub- education and other education, you must sub- tract only the tax-exempt part from the cost of Example 3. Dave works in Nashville and tract only part of the payment from the cost of your qualifying education. recently traveled to California to take a 2-week your qualifying education. seminar. The seminar is qualifying education. Example. Your tuition for qualifying educa- While there, he spent an extra 8 weeks on Example. Your tuition and fees for three tion is $8,000. You receive a $6,000 scholarship personal activities. The facts, including the extra courses are $1,500. Only two of the three of which $4,000 is tax exempt and $2,000 is 8-week stay, show that his main purpose was to courses are qualifying education. The two taxable. You can include only $4,000 ($8,000 – take a vacation. courses cost $1,000. You receive a $780 educa- $4,000) as deductible educational expenses. He cannot deduct his round-trip airfare or his tional assistance payment from the VA under a

meals and lodging for the 8 weeks. He can Part of tuition qualifies. If only part of your program that covers tuition and fees only. The

deduct only his expenses for meals (subject to tuition is for qualifying education, you subtract payment does not include any amount for living

the 50% limit) and lodging for the 2 weeks he only part of the tax-exempt scholarship from the expenses. To determine the part of the VA payattended the seminar. cost of your qualifying education. ment to subtract, multiply the payment ($780) by

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a fraction. The numerator (top number) is the are subject to the 50% limit, you must figure 2) Is part of a program of study that can qualcost of the qualifying education ($1,000) and the them separately from your other expenses. If ify you for a new trade or business.

denominator (bottom number) is the total cost of your employer paid you a single amount to cover

your education ($1,500). both meals and other expenses, you must allocate the reimbursement so that you can figure Where To Deduct Expenses

$1,000 your excess meal expenses separately. You $780 × = $520 Self-employed persons and employees report $1,500 make the allocation as follows. their business expenses differently. The result ($520) is the amount you must sub- 1) Divide your meal expenses by your total The following information explains what tract from the cost of your qualifying education. expenses. forms you must use to deduct the cost of your You can include $480 ($1,000 − $520) as de- qualifying education as a business expense. ductible educational expenses. 2) Multiply your total reimbursement by the

result from (1). This is the allocated reimbursement for your meal expenses. Self-Employed Persons Education Savings 3) Subtract the amount figured in (2) from Bond Program If you are self-employed, you must report the your total reimbursement. The difference is cost of your qualifying work-related education on the allocated reimbursement for your other You may be able to exclude from your gross expenses of qualifying education. the appropriate form used to report your busi- income all or part of the interest you received on ness income and expenses (Schedule C, the redemption of qualified U.S. savings bonds if C–EZ, or F). If your educational expenses in- you pay qualified higher educational expenses Example. Your employer paid you an ex- clude expenses for a car or truck, travel, or during the same year. This exclusion is known pense allowance of $2,000 under an accounta- meals, report them the same way you report as the Education Savings Bond Program. ble plan. The allowance was to cover all of your other business expenses for those items. See See chapter 8 of Publication 970 for more expenses of traveling away from home to take a the instructions for the form you file for informa- information on the Education Savings Bond Pro- 2-week training course for work. There was no tion on how to complete it. gram. indication of how much of the reimbursement

was for each type of expense. Your actual expenses equal $2,500 ($425 for meals + $700 Employees lodging + $150 transportation expenses + How To Treat $1,225 for books and tuition). If you are an employee, you can deduct the cost

You must allocate the reimbursement be- of qualifying work-related education only if you Reimbursements tween the $425 meal expenses and the $2,075 were not reimbursed by your employer or if the

other expenses. The allocated reimbursement costs exceeded your reimbursement. (Amounts How you treat reimbursements depends on the for meals is $340 and the allocated reimburse- your employer paid under a nonaccountable arrangement you have with your employer. ment for other expenses is $1,660, figured in the plan and included in box 1 of your Form W–2 There are two basic types of reimbursement following steps. are not considered reimbursements.) arrangements — accountable plans and In order to deduct the cost of your qualifying nonaccountable plans. You can tell the type of 1) You divide $425 (your meal expenses) by work-related education as a business expense, plan you are reimbursed under by the way the $2,500 (your total expenses). The result is include the amount with your deduction for any reimbursement is reported on your Form W–2, .17. other employee business expenses on line 20 of Wage and Tax Statement. 2) You multiply $2,000 (your reimbursement) Schedule A (Form 1040). (Special rules for exby .17. The $340 result is the allocated penses of certain performing artists and fee-ba- Accountable Plans reimbursement for your meal expenses. sis officials and for impairment-related work

expenses are explained later.) This deduction is If you are reimbursed under an accountable 3) You subtract $340 from $2,000. The subject to the 2%-of-adjusted-gross-income plan, your employer should not include any re- $1,660 difference is the allocated reim- limit that applies to most miscellaneous itemized bursement for your other expenses of imbursement in your income in box 1 of your deductions. Form W–2. To be an accountable plan, your qualifying education.

employer’s reimbursement arrangement must Your excess meal expenses are $85 ($425 − Form 2106 or 2106–EZ. To figure your de- require you to meet all three of the following $340) and your excess other expenses are $415 duction for employee business expenses, in- rules. ($2,075 − $1,660). After you apply the 50% limit cluding qualifying work-related education, you to your meals, you have an educational expense 1) Your expenses must have a business con- generally must complete Form 2106 or deduction of $457.50 [($85 × 50%) + $415]. nection — that is, your expenses must be 2106–EZ.

deductible under the rules for qualifying Nonaccountable Plans Form not required. Do not complete either work-related education explained earlier. Form 2106 or 2106–EZ if:

2) You must adequately account to your em- Your employer will combine the amount of any • You were not reimbursed for any of your ployer for your expenses within a reasona- reimbursement or other expense allowance paid expenses, and ble period of time. to you under a nonaccountable plan with your

wages, salary, or other pay and report the total • You are not claiming travel, transportation, 3) You must return any reimbursement or al- in box 1 of your Form W–2. meal, or entertainment expenses. lowance in excess of the expenses ac- You can deduct your expenses regardless of counted for within a reasonable period of whether they are more than, less than, or equal If you meet both of these requirements, enter time.

to your reimbursement. This is discussed later the expenses directly on line 20 of Schedule A

Any part of your reimbursement that does not under Where To Deduct Expenses. An illus- (Form 1040). (Special rules for expenses of cermeet all three rules is considered paid under a trated example of a nonaccountable plan, using tain performing artists and fee-basis officials and

nonaccountable plan. Form 2106–EZ, is shown toward the end of this for impairment-related work expenses are expublication. plained later.) Expenses equal reimbursement. If your expenses equal your reimbursement, you do not Using Form 2106–EZ. This form is shorter Reimbursements for nondeductible complete Form 2106 or 2106–EZ. Because and easier to use than Form 2106. Generally, expenses. Reimbursements you received for your expenses and reimbursements are equal, you can use this form if: nondeductible expenses are treated as paid you do not have a deduction. under a nonaccountable plan. You must include • You were not reimbursed for any of your them in your income. For example, you must Excess expenses. If your expenses are more expenses, and include in your income reimbursements your than your reimbursement, you can deduct your employer gave you for expenses of education • You are using the standard mileage rate if excess expenses. This is discussed later under you are claiming vehicle expenses. Where To Deduct Expenses. that:

Allocating your reimbursements for 1) You need to meet the minimum educa- If you do not meet both of these requirements,

meals. Because your excess meal expenses tional requirements for your job, or use Form 2106.

Page 6
Performing artists and fee-basis officials. If Educational assistance benefits do not in- 2) Canceled checks and receipts to verify

you are a qualified performing artist, or a state clude payments for the following items. amounts you spent for:

(or local) government official who is paid in

whole or in part on a fee basis, you can deduct 1) Meals, lodging, transportation, or tools or a) Tuition and books,

supplies (other than textbooks) that you the cost of your qualifying work-related educa- b) Meals and lodging while away from can keep after completing the course of tion as an adjustment to gross income rather home overnight for educational pur- instruction. than as an itemized deduction. poses, Include the cost of your qualifying education 2) Education involving sports, games, or hob- with any other employee business expenses on c) Travel and transportation, and bies unless the education has a reasonaline 34 of Form 1040. You do not have to itemize ble relationship to the business of your d) Other educational expenses. your deductions on Schedule A (Form 1040), employer or is required as part of a degree and, therefore, the deduction is not subject to program. 3) Statements from your employer explaining the 2%-of-adjusted-gross-income limit. You whether the education was necessary for must complete Form 2106 or 2106–EZ to figure Benefits over $5,250. If your employer pays you to keep your job, salary, or status; how your deduction even if you meet the require- more than $5,250 for educational benefits for the education helped maintain or improve ments described earlier under Form not re- you during the year, you must generally pay tax skills needed in your job; how much reim- quired. on the amount over $5,250. Your employer bursement you received; and the type of For more information on qualified performing should include in your wages (box 1 of your certificate and subjects taught, if you are a artists, see Publication 463. Form W–2) the amount that you must include in teacher.

income. Impairment-related work expenses. If you 4) Complete information about any scholar- are disabled and have impairment-related work Working condition fringe benefit. How- ship or fellowship grants, including expenses that are necessary for you to be able ever, if the payments also qualify as a working amounts you received during the year. to get qualifying work-related education, you can condition fringe benefit, your employer does not deduct these expenses on line 27 of Schedule A have to include them in your wages. A working (Form 1040). They are not subject to the condition fringe benefit is a benefit which, had 2%-of-adjusted-gross-income limit. To deduct you paid for it, you could deduct as an employee these expenses, you must complete Form 2106 business expense. Illustrated Example

or 2106–EZ even if you meet the requirements

described earlier under Form not required. Using Form 2106–EZ

For more information on impairment-related

work expenses, see Publication 463. Victor Jones teaches math at a private high Recordkeeping school in North Carolina. He was selected to

attend a 3-week math seminar at a university in

You must keep records as proof of any California. The seminar will improve his skills in

Employer-Provided deduction claimed on your tax return. his current job and is qualifying education. He RECORDS Generally, you should keep your rec- was reimbursed for his expenses under his

Educational ords for 3 years from the date of filing the tax employer’s nonaccountable plan, so his reimreturn and claiming the deduction. bursement of $2,100 is included in the wages

Assistance shown on his Form W–2. Victor will file Form

1040. If you are an employee who is reimbursed for If you receive educational assistance benefits His actual expenses for the seminar are as expenses and you give your records and docu- follows: from your employer under an educational assis- mentation to your employer, you do not have to tance program, you can exclude up to $5,250 of keep duplicate copies of this information. How- Lodging ................. $1,050 those benefits each year. This means your em- ever, you should keep your records for a 3-year Meals . . . . . . . . . . . . . . . . . . . 526 ployer should not include the benefits with your period if: Airfare . . . . . . . . . . . . . . . . . . 550 wages, tips, and other compensation shown in Taxi fares . . . . . . . . . . . . . . . . 50 box 1 of your Form W–2. This also means that 1) You claim deductions for expenses that Tuition and books . . . . . . . . . . . 400 you do not have to include the benefits on your are more than your reimbursement, Total Expenses $2,576 income tax return. 2) Your employer does not use adequate ac- Because Victor’s reimbursement was in- You must reduce your deductible ed- counting procedures to verify expense ac- cluded in his income, he files Form 2106–EZ ucational expenses by the amount of counts, with his tax return. He shows his expenses for CAUTION any tax-free educational assistance

!

the seminar in Part I of the form. He enters 3) You are related to your employer, or benefits you received for those expenses. $1,650 ($1,050 + $550 + $50) on line 3 to ac- 4) Your expenses are reimbursed under a count for his lodging, airfare, and taxi fares. He nonaccountable plan. enters $400 on line 4 for his tuition and books. Educational assistance program. To qualify On the line to the left of line 5, Victor enters $526 as an educational assistance program, the plan Examples of records to keep. If any of the for meal expenses. He multiplies that amount by must be written and must meet certain other above cases apply to you, you must be able to 50% and enters the result, $263, on line 5. On requirements. Your employer can tell you prove that your expenses are deductible. You line 6, Victor totals the amounts from lines 3 whether there is a qualified program where you should keep adequate records or have sufficient through 5. He carries the total, $2,313, to line 20 work. evidence that will support your expenses. Esti- of Schedule A (Form 1040).

Educational assistance. Tax-free educa- mates or approximations do not qualify as proof Since he does not claim any vehicle ex- of an expense. Some examples of what can be tional assistance benefits include payments for penses, Victor leaves Part II blank. His filled-in used to help prove your expenses are: tuition, fees and similar expenses, books, sup- form is shown on the next page.

plies, and equipment. For courses beginning on 1) Documents, such as transcripts, course or after January 1, 2002, the payments may be descriptions, catalogs, etc., showing peri- for either undergraduate- or graduate-level ods of enrollment in educational institu- courses. The payments do not have to be for tions, principal subjects studied, and work-related courses. descriptions of educational activity.

Page 7
Proof as of

October 21, 2002

(subject to change)

Victor Jones Teaching 123 00 4321

1,650

400

263

2,313

526

OMB No. 1545-1441 2106-EZ Unreimbursed Employee Business Expenses Form

Department of the Treasury

Internal Revenue Service Attach to Form 1040.

Attachment

Sequence No. 54A

Your name Occupation in which you incurred expenses Social security number

1

Vehicle expense using the standard mileage rate. Complete Part II and multipy line 8a by 361⁄2¢

(.365)

1

2

Parking fees, tolls, and transportation, including train, bus, etc., that did not involve overnight

travel or commuting to and from work

2

Travel expense while away from home overnight, including lodging, airplane, car rental, etc.

Do not include meals and entertainment

3

3

4 Business expenses not included on lines 1 through 3. Do not include meals and entertainment 4

5

Meals and entertainment expenses: $ x 50% (.50) (Employees subject to

Department of Transportation (DOT) hours of service limits: Multiply meal expenses by 65%

(.65) instead of 50%. For details, see instructions.)

5

Total expenses. Add lines 1 through 5. Enter here and on line 20 of Schedule A (Form 1040).

(Fee-basis state or local government officials, qualified performing artists, and individuals with

disabilities: See the instructions for special rules on where to enter this amount.)

6

6

Cat. No. 20604Q Form 2106-EZ (2002)

Part I

Part II

Figure Your Expenses

You May Use This Form Only if All of the Following Apply.

● You are an employee deducting ordinary and necessary expenses attributable to your job. An ordinary expense is one that is

common and accepted in your field of trade, business, or profession. A necessary expense is one that is helpful and appropriate

for your business. An expense does not have to be required to be considered necessary.

● If you are claiming vehicle expense, you are using the standard mileage rate for 2002.

● You do not get reimbursed by your employer for any expenses (amounts your employer included in box 1 of your Form W-2 are

not considered reimbursements).

Information on Your Vehicle. Complete this part only if you are claiming vehicle expense on line 1.

7

8

a

9

10

11a

b

When did you place your vehicle in service for business use? (month, day, year) / /

Of the total number of miles you drove your vehicle during 2002, enter the number of miles you used your vehicle for:

Do you (or your spouse) have another vehicle available for personal use?

Was your vehicle available for personal use during off-duty hours?

Do you have evidence to support your deduction?

If “Yes,” is the evidence written?

Business

Yes No

b Commuting c Other

Yes No

Yes No

Yes No

(99)

General Instructions

Section references are to the Internal

Revenue Code.

Purpose of Form

You may use Form 2106-EZ instead of Form

2106 to claim your unreimbursed employee

business expenses if you meet all the

requirements listed above Part I.

Changes To Note

Standard mileage rate. The standard

mileage rate has been increased to 361⁄2

cents for each mile of business use in 2002.

Recordkeeping

You cannot deduct expenses for travel

(including meals, unless you used the

standard meal allowance), entertainment,

gifts, or use of a car or other listed property,

unless you keep records to prove the time,

place, business purpose, business

relationship (for entertainment and gifts), and

amounts of these expenses. Generally, you

must also have receipts for all lodging

expenses (regardless of the amount) and any

other expense of $75 or more.

For Paperwork Reduction Act Notice, see back of form.

Caution: You can use the standard mileage rate for 2002 only if: (a) you owned the vehicle and used the standard mileage

rate for the first year you placed the vehicle in service or (b) you leased the vehicle and used the standard mileage rate for the

portion of the lease period after 1997.

Additional Information

For more details about employee business

expenses, see:

Pub. 463, Travel, Entertainment, Gift, and Car

Expenses

Pub. 529, Miscellaneous Deductions

Pub. 587, Business Use of Your Home

(Including Use by Day-Care Providers)

Pub. 946, How To Depreciate Property

Meal expenses. The percentage of meal

expenses that may be deducted by

employees subject to Department of

Transportation (DOT) hours of service limits

has been increased to 65% for 2002.

2002

Specific Instructions

Part I—Figure Your Expenses

Line 2. See the line 8b instructions for the

definition of commuting.

Line 3. Enter lodging and transportation

expenses connected with overnight travel

away from your tax home (defined below).

You cannot deduct expenses for travel away

from your tax home for any period of

temporary employment of more than 1 year.

Do not include expenses for meals and

entertainment. For more details, including

limits, see Pub. 463.

Page 8
You can also reach us with your computer with a tax problem. Now you can set up an

How To Get Tax Help using File Transfer Protocol at ftp.irs.gov. appointment by calling your local IRS office number and, at the prompt, leaving a

You can get help with unresolved tax issues, TaxFax Service. Using the phone at- message requesting Everyday Tax Soluorder free publications and forms, ask tax ques- tached to your fax machine, you can tions help. A representative will call you

tions, and get more information from the IRS in receive forms and instructions by call- back within 2 business days to schedule

several ways. By selecting the method that is ing 703–368–9694. Follow the directions from an in-person appointment at your conve- the prompts. When you order forms, enter the best for you, you will have quick and easy ac- nience.

catalog number for the form you need. The items cess to tax help. you request will be faxed to you.

For help with transmission problems, call the Mail. You can send your order for Contacting your Taxpayer Advocate. If you FedWorld Help Desk at 703–487–4608. forms, instructions, and publications to have attempted to deal with an IRS problem the Distribution Center nearest to you unsuccessfully, you should contact your Tax- and receive a response within 10 workdays after payer Advocate. Phone. Many services are available by your request is received. Find the address that

The Taxpayer Advocate represents your in- phone. applies to your part of the country. terests and concerns within the IRS by protect- • Western part of U.S.: ing your rights and resolving problems that have Western Area Distribution Center not been fixed through normal channels. While

Taxpayer Advocates cannot change the tax law • Ordering forms, instructions, and publica- Rancho Cordova, CA 95743–0001

or make a technical tax decision, they can clear tions. Call 1–800–829–3676 to order cur- • Central part of U.S.: up problems that resulted from previous con- rent and prior year forms, instructions, and Central Area Distribution Center publications. tacts and ensure that your case is given a com- P.O. Box 8903

plete and impartial review. • Asking tax questions. Call the IRS with Bloomington, IL 61702–8903 To contact your Taxpayer Advocate: your tax questions at 1–800–829–1040. • Eastern part of U.S. and foreign

• Call the Taxpayer Advocate at • Solving problems. Take advantage of Eve- addresses:

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local IRS office to set up an in-person ap- P.O. Box 85074 • Call, write, or fax the Taxpayer Advocate pointment at your convenience. Check Richmond, VA 23261–5074 office in your area. your local directory assistance or

• Call 1–800–829–4059 if you are a www.irs.gov for the numbers. CD-ROM for tax products. You can TTY/TDD user. • TTY/TDD equipment. If you have access order IRS Publication 1796, Federal

to TTY/TDD equipment, call 1–800–829– Tax Products on CD-ROM, and obtain: For more information, see Publication 1546, 4059 to ask tax questions or to order The Taxpayer Advocate Service of the IRS. forms and publications. • Current tax forms, instructions, and publiFree tax services. To find out what serv- • TeleTax topics. Call 1–800–829–4477 to cations.

ices are available, get Publication 910, Guide to listen to pre-recorded messages covering • Prior-year tax forms and instructions. Free Tax Services. It contains a list of free tax various tax topics.

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describes other free tax information services, electronically, printed out for submission, Evaluating the quality of our telephone serv- including tax education and assistance pro- and saved for recordkeeping. ices. To ensure that IRS representatives give grams and a list of TeleTax topics. accurate, courteous, and professional answers, • Internal Revenue Bulletins.

Personal computer. With your per- we use several methods to evaluate the quality

sonal computer and modem, you can of our telephone services. One method is for a The CD-ROM can be purchased from Naaccess the IRS on the Internet at second IRS representative to sometimes listen tional Technical Information Service (NTIS) by www.irs.gov. While visiting our web site, you in on or record telephone calls. Another is to ask calling 1–877–233–6767 or on the Internet at can: some callers to complete a short survey at the http://www.irs.gov/cdorders. The first release

end of the call. • See answers to frequently asked tax ques- is available in early January and the final release

is available in late February. tions or request help by e-mail.

Walk-in. Many products and services • Download forms and publications or are available on a walk-in basis. CD-ROM for small businesses. IRS

search for forms and publications by topic Publication 3207, Small Business Reor keyword. source Guide, is a must for every small

• Order IRS products on-line. business owner or any taxpayer about to start a • Products. You can walk in to many post business. This handy, interactive CD contains • View forms that may be filled in electroni- offices, libraries, and IRS offices to pick up all the business tax forms, instructions and pub- cally, print the completed form, and then certain forms, instructions, and publica- lications needed to successfully manage a busi- save the form for recordkeeping. tions. Some IRS offices, libraries, grocery ness. In addition, the CD provides an stores, copy centers, city and county gov- • View Internal Revenue Bulletins published abundance of other helpful information, such as ernments, credit unions, and office supply in the last few years. how to prepare a business plan, finding financ- stores have an extensive collection of ing for your business, and much more. The de- • Search regulations and the Internal Reve- products available to print from a CD-ROM sign of the CD makes finding information easy nue Code. or photocopy from reproducible proofs. and quick and incorporates file formats and Also, some IRS offices and libraries have • Receive our electronic newsletters on hot browsers that can be run on virtually any the Internal Revenue Code, regulations, tax issues and news. desktop or laptop computer. Internal Revenue Bulletins, and Cumula-

• Learn about the benefits of filing electroni- tive Bulletins available for research pur- It is available in March. You can get a free

cally (IRS e-file). poses. copy by calling 1-800-829-3676 or by visiting the

website at www.irs.gov/smallbiz. • Get information on starting and operating • Services. You can walk in to your local

a small business. IRS office to ask tax questions or get help

Page 9
To help us develop a more useful index, please let us know if you have ideas for index entries. Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

A P Employer-provided Suggestions for publication . . . 2

Accountable plans ......... 6 educational assistance .... 7 Performing artists ......... 7

Assistance (See Tax help) Publications (See Tax help) T

F Tax help ................ 9

B Q Fee-basis officials ......... 7 TaxFax service ........... 9

Bar review course ......... 4 Form: Qualifying work-related education: Taxpayer Advocate ........ 9

2106 ................ 6 Defined ............... 2 Teaching:

C 2106–EZ . . . . . . . . . . . . . 6 Does Your Work-Related Certification ............ 3

2106–EZ, illustrated ...... 8 Education Qualify? Minimum job requirements . . 3 Claiming expenses ........ 6 Forms (See Tax help) (flowchart) ........... 3 Related duties .......... 4 Comments on publication .... 2 Free tax services .......... 9 Improving skills . . . . . . . . 2-3 Temporary: Conventions ............. 5 Indefinite absence from Absence from job ........ 2

Costs (See Deductible business H job . . . . . . . . . . . . . . . . 3 Attendance at school ...... 4

expenses, type of expense) Maintaining skills . . . . . . . 2-3 Transportation expenses: Help (See Tax help) CPA review course ........ 4 Minimum job Deductible ............. 4

Cruises ................ 5 requirements . . . . . . . . 3-4 Standard mileage rate . . . 1, 4 I New trade or business ..... 4 Travel as education ........ 5

Illustrated example . . . . . . . . 7-8 Required by employer or D Travel expenses: Impairment-related work law . . . . . . . . . . . . . . . . 2 Deductible business expenses: Conventions ........... 5

expenses ............. 7 Teachers ............. 3 Defined ............... 4 Cruises ............... 5

Improving skills . . . . . . . . . . 2-3 Temporary absence from Education Savings Bond Deductible ............. 5 job . . . . . . . . . . . . . . . . 2 Program ............ 6 Indefinite absence from job . . . 3 Meals ................ 5 Temporary school Education, work-related .... 2 Nondeductible .......... 5 attendance ........... 4 Employer-provided K TTY/TDD information ....... 9

educational assistance . . . 7 Keeping records .......... 7 Proof of expense ........ 7 R V Recordkeeping .......... 7 Recordkeeping ........... 7

M Veterans’ benefit payments . . . 5 Savings bonds .......... 6 Reimbursements:

Scholarships ........... 5 Maintaining skills . . . . . . . . . 2-3 Accountable plans ....... 6

Transportation .......... 4 Meal expenses ........... 5 Nonaccountable plans ..... 6 W

Travel ................ 5 Minimum job requirements . . 3-4 Nondeductible expenses . . . 6 Where to deduct business

Veterans’ benefit More information (See Unclaimed ............. 4 expenses: Tax help)

payments ............ 5 Required education: Employees ............ 6

Where to deduct ......... 6 Defined ............... 2 Fee-basis officials ........ 7 N Minimum . . . . . . . . . . . . . 3-4 Impairment-related work New trade or business: Teachers ............. 3 expenses ............ 7 E CPA . . . . . . . . . . . . . . . . . 4 Performing artists ........ 7 Education (See Qualifying Education required ....... 4 Self-employed persons .... 6 work-related education) Law . . . . . . . . . . . . . . . . . 4 S

Education Savings Bond Teaching .............. 4 Savings bonds ........... 6 ■

Program .............. 6 Nonaccountable plans ...... 6 Scholarships ............. 5

Educational assistance from Nondeductible expenses (See Standard mileage rate . . . . 1, 4

employer .............. 7 Deductible business expenses)

Page 10