Q: What's the best tax strategy for students whose income is too high for them to qualify for the tax credits?
A: If your employer isn't going to pay for it, you may be able to set up your own consulting business. That makes you your own employer. As long as the requirements are met that you're improving your position and not moving into a new business, then you can deduct all of the expenses related to going back to school, such as buying books, paying tuition, and travel costs. If you need a new computer, that's a business expense. If you need a DSL line, that's a business expense.

You have to show some gross income, and that's the hard part. It's not going to pass the smell test if you say you're a consultant but you've only got expenses. You also have to show how hard you've tried to develop income. Have you sent solicitation letters? Have you had business meetings to develop relationships? A lot of people have signed on as a consultant or independent contractor with their former employers, with their former employer paying for work on some specific projects.

Q: Can you classify a summer internship as a consulting gig?
A: Probably not. If you get a W-2 form from your employer, you won't qualify as an independent consultant.

Q: How would someone set up as a consultant?
A: One way is to form a limited liability company, or an S corporation (which tends to provide the same liability protection as an LLC). All you really need to do is show that you've got a 1099 form at the end of the year. That's proof-positive that you're an independent contractor and in the consulting business.

Q: When is a good time to get in touch with an accountant if you're thinking about going back to school?
A: You want to get a strategy and know what your options are. If you want to go the consulting route, you want to be setting that up six-to-nine months ahead of time to support the fact that you're in the business. It's part of financial planning that says, "What's the true cost of this education, and what can I do to reduce this cost?" If you wait too late, you may have missed some opportunities.

Q: What other tips do you offer MBAs returning to school?
A: The old-fashioned way, your fallback, is that these expenses -- tuition, books, transportation costs -- can fall under the miscellaneous itemized deductions if you meet the requirements on reimbursed employee business expenses but were never reimbursed by your employer. Also, you must have incurred the cost while you were working. With that category deduction, you lose 2% of those deductions toward your adjusted gross income.

Q: What advice do you have for employers who are considering paying for an employee's MBA?
A: As long as the course doesn't qualify the individual for a new trade or business and is a course that enhances the skills that they already have, then it's tax-deductible for the employer on a straight, outright basis. So if a boss spends $10,000 to send Jane to business school, they'll get a $10,000 deduction against the company's gross income.

The employer deduction can happen in one of two ways. Section 127 is a qualified educational reimbursement program but has to meet a lot of IRS requirements, including a written plan and information about the company's nondiscrimination process. That's wide open, as far as what courses can be taken [though you can't take sports-related classes].

Option two, Section 162, says an employer can pay for its employees' education provided that the courses are job-related and treated as an ordinary and necessary business expense. Typically, if employees are going back for an MBA, they've already met the minimum requirements for a job, so they're clearly in a position of enhancing their knowledge and helping the employer.

Q: It seems like option two is way to go for employers...
A: It's absolutely the way to go, and it's so simple that a lot of employers forget about it. One of the nice things about it is that the employer can put restrictions on the employee contract that says, for instance, "We'll only reimburse your education if you plan to stick with the company for another two years, or if you earn a certain grade-point average."

Q: Some students are lucky enough to attend business school for free. Either their employer foots the bill or they receive scholarships. Are these MBAs eligible for school-related tax deductions?
A: If they're 100%-funded by their employer, they're not eligible for any [deductions]. Scholarships are generally tax-free, but if a portion of the scholarship covers room and board, it will be treated as taxable income. If a portion covers fees, that may or may not be taxable.

Q: If a student doesn't have an accountant, are there any books you'd suggest turning to for some early number-crunching?
A: I'd suggest two IRS publications. Publication 970, Tax Benefits for Education, and Publication 520, Scholarships and Fellowships. Both give a thorough analysis of the type of educational benefits available.

Q: Any final words of wisdom for MBAs?
A: What may be a tax benefit for one person may not be the same for his neighbor. It all depends on personal circumstances. Some things that will change your benefits include your income level, your filing status (married/single), age, occupation, and your status as an employee.

Are you an employee or an independent contractor? Know what you have to do in order to qualify for certain deductions. If you know that your income level is $65,000, a cutoff for a deduction, see if you can push some of that income into the next year, and you may get the benefit of a deduction in the current year.

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