Question

All of the following statements regarding tax treatment of education expenses except

A) Javier is an associate in a CPA firm. He pays out of his own funds to attend an update course on new FASB standards. Javier can deduct his cost for the course as a miscellaneous itemized deduction (subject to the 2% nondeductible floor).
B) Fred, who recently graduated law school, is working in a law firm. The firm requires that he pass the bar exam by a certain date, or he will lose his job. Fred can deduct his cost for the bar exam review course as a miscellaneous itemized deduction (subject to the 2% nondeductible floor).
C) Iris is an associate in a law firm. She attends an update course on contract drafting, and she is reimbursed by the law firm. There is no effect on Iris' tax return.
D) Sophie is a partner in a CPA firm. She pays out of her own funds to attend an update course on estate and gift tax planning. Sophie can deduct the cost of the course for AGI.

Answer 1

Option D is incorrect because, under the Tax Cuts and Jobs Act of 2017, miscellaneous itemized deductions, including the cost of work-related education, are suspended for tax years 2018 through 2025.

Step-by-step explanation:

The incorrect statement in the tax treatment of education expenses is option D) Sophie is a partner in a CPA firm. She pays out of her own funds to attend an update course on estate and gift tax planning. Sophie can deduct the cost of the course for AGI.

For tax purposes, the cost of education that maintains or improves skills required in one's present employment may be deductible as a miscellaneous itemized deduction. These deductions are limited to the amount that exceeds 2% of the taxpayer's adjusted gross income (AGI) when they are allowed. However, the Tax Cuts and Jobs Act of 2017 suspended miscellaneous itemized deductions for tax years 2018 through 2025, which means that these expenses currently cannot be deducted. Hence, none of the options A, B, and D would currently allow for a deduction.

For someone like Iris, who is reimbursed by her employer for attending an educational course, there is no tax effect because it would typically be classified as a working condition fringe benefit, which is not included in taxable income.