If you re going back to school to improve your skills in this awful job environment, I want you to know about some tax breaks that can help pay the bills. (For now, please forget about educating your kids or grandkids; this is all about you.)

In two earlier articles, I explained when you can claim the American Opportunity tax credit (up to $2,500), the Lifetime Learning tax credit (up to $2,000), and the deduction for tuition and fees (up to $4,000 whether you itemize or not). Unfortunately, all these breaks have income restrictions, so you may not be eligible. (For more details, read my columns here and here

The good news is, there are some education tax breaks that don t depend on your income. Here s what you need to know.

Take Advantage of Your Company s Educational Assistance Program

Some lucky folks work at companies with educational assistance programs that will give each eligible employee up to $5,250 in annual tax-free reimbursements. These plans are sometimes called Section 127 plans (named after the part of our beloved Internal Revenue Code that allows them). The tax rules permit them to cover just about anything that constitutes education, including graduate coursework, whether it s job-related or not. However, some plans only reimburse for education that is, in fact, job-related, which is understandable. There are only two tax-law restrictions: (1) the education must be for you, the employee, rather than another member of your family, and (2) the plan can t pay for courses involving sports, games, or hobbies unless they relate to company business. Frankly, some companies don t do a very good job of publicizing their Section 127 plans, so check your employee benefits manual, or check in with your benefits department. You might be glad you did.

Seek Company Reimbursements for Job-Related Education

Your employer can also give you an unlimited amount of tax-free reimbursements to cover qualified education expenses. In a nutshell, you have qualified expenses if: (1) the education is required by your employer or by law or regulation in order for you to retain your current job or (2) the education maintains or improves skills required in your current job. You don t have qualified expenses if the education sets you up for a new occupation or profession. If your employer pays for that kind of education, the payments count as taxable compensation--unless the reimbursements are run through a Section 127 plan (see above).

Deduct Job-Related Education as Unreimbursed Employee Business Expense

Sadly, you may not be in a position to get any help from your employer. But you may be able to write off all or a portion of your qualified education expenses as a miscellaneous itemized deduction for unreimbursed employee business expenses. Enter your qualified expenses on Schedule A (Itemized Deductions) along with any other miscellaneous itemized deduction items like union dues, fees for tax preparation and advice, and investment expenses. Then if the sum total of all your miscellaneous expense items exceeds 2% of your adjusted gross income (AGI), you can write off the excess. If not, you get no write-off. Sorry.

The IRS says an undergraduate degree automatically prepares you for a new profession, so costs to obtain a BA or BS are <i>not</i> qualified education expenses, and you can t deduct them. The IRS makes the same argument about MBAs, but two recent Tax Court decisions disagree. They say MBA costs are qualified expenses if the extra degree simply maintains or improves skills needed in your current job, which is often the case. If that s your deal, I say go ahead and claim your rightful deduction on Schedule A, assuming you can clear the 2%-of-AGI hurdle.

One more thing: under the alternative minimum tax (AMT) rules, you get absolutely no write-off for miscellaneous itemized deduction items. So if you re in the AMT zone, you may be out of luck. Sorry. You can thank your beloved Congress for always looking out for the little guy.

If You Are Self-Employed

Good news. You can deduct qualified education expenses that are related to your current business on your business tax form (Schedule C for sole proprietors, Schedule E for partners, or Schedule F for farmers and ranchers). You don t have to worry about the dreaded 2%-of-AGI rule or the dreaded AMT disallowance rule. Those anti-taxpayer provisions don t apply in your situation. (The earlier comments about undergraduate degrees and MBAs do apply.)

Final Words

The issue of tax breaks for education expenses is confusing. There are multiple breaks with multiple sets of rules, and different breaks can potentially be available for the same expenses. To keep your head screwed on straight, follow this procedure. First, see if your employer offers a Section 127 plan. When available, it s the best option, because the company pays the bills, and it s tax-free. Next, see if your expenses are eligible for either of the two tax credits by filling out Form 8863 (Education Credits). If not, see if they are eligible for the tuition and fees deduction by filling out Form 8917 (Tuition and Fees Deduction). Still no dice? Read the last two-thirds of this article again -- more carefully this time.