Taxpayer asks:
Hi,
Is the rule different if the firm pays for the BarBri expenses themselves? Is this repayment taxable as ordinary income? Any tax code references would be appreciated, too (though not by any means necessary).
Gracias,
Taxgirl says:
This is one of those posts that I can already tell that I’m going to get emails about because somebody’s going to say that their employer told them (insert any one of many interesting tidbits here). But I’m writing my opinion anyway…
Reimbursements for nondeductible expenses (and BarBri and other bar related expenses are, as noted in the post linked above, not deductible expenses) are generally taxable and reported as income.
With respect to education related expenses, the IRS has expressly stated that you must include in income reimbursements that “you need to meet the minimum educational requirements for your job or is part of a program of study that can qualify you for a new trade or business.” My take, then, is that bar-related expenses which are reimbursed or paid by your employer are generally taxable (you could likely carve out some exceptions for deductible expenses, as discussed in the prior post).
No tax code references but you can read more about educational expenses in IRS Pub 970 (available here as a pdf).
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
Taxpayer asks:
As a newly minted lawyer that is now doing contract work, I was wondering if Bar exam prep classes are tax deductible? Or any licensing fees, occupation state taxes, or expenses related to GETTING a law license are tax deductible. There is a thread on JDU on this but no one seems to have a clear answer. Thanks!
Taxgirl says:
Ooh, as a newly minted lawyer, you’ll appreciate that my answer is yes – and no.
Easy one first: state and local taxes are deductible if you itemize your deductions. So, include any state occupational taxes on a Schedule A.
Bar exam prep classes are not deductible to an individual taxpayer, nor are expenses relating to get a law license. Some work related education expenses can be deductible if they are required as a condition of continued employment (think CLEs, for example), but you cannot deduct work-related education expenses if they are needed to meet the minimum requirements to qualify you to work or if the expenses will lead to qualifying you in a new occupation. Bar prep fees are not deductible since they’re not required (!) as a condition of your employment. Bar application fees and the like don’t count since they are the minimum requirements to get you started in the profession – you can’t work as a lawyer without being admitted to the bar.
Dues for professional organizations, like bar associations, are deductible as miscellaneous expenses on Schedule A. Subscriptions to law journals and the like are similarly deductible.
Since a few folks raised the LLM as an issue on the thread that you linked to in your question, I’ll address that, too. The cost of an LLM is not automatically deductible: you must still meet certain criteria. For one, the LLM must be serve to maintain or improve skills required in your present work or it must be required by your employer or by law to keep your salary, status, or job. Even if you meet one of those criteria, you cannot deduct the expenses if the education is needed to meet the minimum educational requirements to qualify you in your trade or business (as with your JD), or is part of a program of study that will lead to qualifying you in a new trade or business.
As a tax lawyer, one of my first tax law jobs was contingent on my earning my LLM Taxation: that made my additional degree deductible.
(Editor’s note: see comments below.)
Similarly, if you decide to jump from one area of the law (say, trial work) to another (contract law, for example), you cannot deduct the cost of additional education to make that jump. Your additional educational expenses must be related to your present job in order to qualify, in most instances, as a work-related deduction.
(All of that said, the cost of an LLM may qualify for certain educational tax credits, like the Lifetime Learning Credit.)
So, some yes, some no. I hope that helps clear up the confusion!
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
