Document Type


Publication Date

Winter 2010


In Copyright


Education may be a cornerstone of our society, but the tax treatment of higher education expenses does not appear to have resulted from an intellectual exercise that would make our nation’s educators’ proud. The Internal Revenue Code provides two separate, but equally unsatisfying, routes that allow taxpayers to offset their income with the costs of higher education. Where an individual can reduce her tax liability while receiving an education, the effect is to reduce significantly the cost of that education.

First, where amounts spent on education qualify as an “ordinary and necessary business expense,” a taxpayer will be entitled to deduct such expenses in computing her taxable income. However, the Service’s current interpretation of this deduction is more restrictive with respect to education expenses than with respect to other expenditures. The second, and more limited, route to obtaining a tax subsidy arises from certain tax incentives enacted for higher education expenses. These incentives include exclusions from gross income for certain amounts used to pay for higher education expenses, as well as a number of deductions or credits for taxpayers who make such expenditures. While providing incentives for higher education is a worthy goal, the tax incentive provisions consist of a hodgepodge of confusing statutes that fail to meet their stated objectives.

The correlation between education and compensation – i.e., the more education one has, the more one earns – should be properly reflected in the tax code. More specifically, the Code should be revised to provide similar tax treatment for education expenses as is afforded other business expenses.

This Article will discuss the tax treatment of higher educational expenses. Part II traces the history of Section 162 with respect to education expenses leading to the Service’s current interpretation, and provides criticism of the current law in this area. Part III discusses the myriad of tax incentive provisions set forth in the Code, and it briefly discusses some of the concerns associated with those provisions. Part IV provides a framework for revising the Code in connection with higher education expenses, providing guidelines for when such expenses should be currently deductible and when capitalization and amortization should be required. Part V concludes the Article.

This Article does not attempt to address generally whether the government should subsidize such education. The Code has, for years, provided tax incentives for higher education. Nor is it an attempt to end the debate on whether incentives for higher education should be provided through the tax code. Rather, this Article attempts to discuss the current and historical tax treatment of higher education expenses and to provide a system that more properly matches a taxpayer’s income with the associated educational expenses.

Publication Title

Michigan State Law Review

First Page


Last Page