Earning an MBA is an expensive process, with students spending upwards of $65,000 on tuition alone at the top-five full-time MBA programs in BusinessWeek's 2002 rankings. But many graduate students (and even some companies that help MBAs pay their tuition) don't know all the ins and outs of legally maximizing their deductions when they file tax returns each April.

To learn more about smart tax strategies for MBAs, BusinessWeek Online turned to James C. Vonachen, CPA and partner at Clifton Gunderson in Denver. Every tax season, Vonachen's office processes more than 2,300 individual tax returns and 500 business and related entity-tax returns. He's also an MBA himself, having received his business degree from Notre Dame in 1973, followed by a law degree in 1974. He earned his accounting degree at St. Joseph's College in Indiana.

Vonachen recently spoke with BusinessWeek Online reporter Mica Schneider. Here's an edited transcript of their discussion.

Q: What's the most common tax break graduate students pursue?
A: The Lifetime Learning Credit. It's is a dollar-for-dollar credit against tax. This credit is figured at 20% of your qualified educational expenses [often limited to tuition expenses] and is not to exceed $2,000. So if you have $10,000 in tuition expenses, you reach the maximum $2,000 credit.

You won't get this credit if you've earned between $85,000 and $105,000 as a married couple filing jointly in 2004, with the credit starting to phase out after you reach $85,000. Single individuals' income cut-off ranges from $42,000 to $52,000.

Q: MBAs degrees cost a lot more than $10,000 these days. Should MBAs use the Lifetime Learning Credit anyway?
A: Yes, that's the first one you'd want to use up.

Q: And the next credit to use?
A: You may also qualify for the Deduction for Higher Education Expenses, which you're entitled to for tuition and related expenses paid to accredited post-secondary institutions. It also has income cut-offs. If you're married and filing jointly, and [jointly] earning more than $130,000, you're not entitled. If you're single, the limit is $65,000. All other taxpayers aren't offered this benefit. The maximum deduction is $4,000.

Q: It seems that married graduate students should file jointly.
A: To get the majority of these educational benefits, that's correct. You have to do your best guess on numbers, put your pencil to it, but you're not required to think about that until you file your tax return.

Q: What's a common list of school expenses MBAs can deduct? Should they hold onto receipts each time they purchase an accounting book?
A: It depends. Under the Lifetime Learning Credit, books and fees don't qualify as deductions. But under the Deduction for Higher Education Expenses, books and fees do qualify. Some of your independent costs, such as Internet connections, don't qualify under the Lifetime Learning Credit, but they do under the Deduction for Higher Education Expenses.

Q: Can MBAs apply for both deductions?
A: No. One student cannot claim both deductions. However, if a husband and wife are filing jointly, and both are students, then the wife might claim the Lifetime Learning Credit and the husband might claim the Educational Expense Deduction.

Q: MBAs may also save some money listing miscellaneous itemized deductions, right?
A: When you file your tax returns, you're allowed to claim certain categories of expenditures, such as medical expenses, taxes paid, charitable contributions, and unreimbursed business expenses. When you add up all of your itemized expenses across all the categories and it exceeds your standard deduction, which ranges from $4,750 to $9,500, then you can qualify for an extra deduction by itemizing. But these expense limits may change next year.

Q: MBAs usually plan to deduct the interest from their often hefty student loans. Is that a deduction they should rely on?
A: That's one of those deductions you think you get, but you may not qualify for because of its relatively low gross-income limit, about $50,000 to 65,000 for single individuals and $130,000 for married individuals filing jointly. If you're married and filing separately, you can't claim any of the loan interest as a deduction. Beyond those income caps, the [loan-interest] deduction gets phased out. After your MBA, you may find that your income is too high.

Q: Such student-loan deductions could stand to be quite large...
A: They could very well be. It's not unusual to see $20,000 to $25,000 per year worth of principle amounts borrowed for education. You can't get a deduction for the principle of the loan, but if you get a deduction on the interest of the loan, it can help. If you borrow privately, you could be paying 6% to 7% in interest and perhaps also have some undergraduate loans left to pay off. In that case, you could see deductions as high as $7,000 per year in the early years of the loan. There's no cap right now on the interest you can deduct so long as you meet the income qualifications.

Q: Students who plan to return to school in late August or early September often wonder when they should quit their jobs. Should they earn a bit more pocket money and finish work a few days before classes begin? Or should they quit before they make so much money that they don't qualify for deductions?
A: They stand to lose a $4,000 deduction. Someone at that level, probably in the 20% tax bracket [federal and state tax combined], is probably looking at losing about $800. They have to ask, "How much is the $800 loss of tax savings going to hurt me, vs. a full salary?" If you're making $40,000 in gross income, keep working.

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