Enrolling in the Chartered Financial Analyst (CFA) or Certified Financial Planner (CFP) program and taking the relevant exams can be expensive — up to several thousand dollars or more just to review for and then take the exams. That figure doesn't include the cost of completing the necessary college-level course work.
A recurring question among candidates is: Can I deduct exam fees or exam preparation expenses on my taxes?
Well, the short answer is: It depends.
IRS Rules for Deducting Educational Expenses
The Internal Revenue Service publishes rules for deducting what it deems work-related educational expenses from your taxes. Here's what the IRS has to say:
You can deduct the costs of qualifying work-related education as business expenses. This is education that meets at least one of the following two tests.
- The education is required by your employer or the law to keep your present salary, status, or job. The required education must serve a bona fide business purpose of your employer.
- The education maintains or improves skills needed in your present work.
In practice, for those in the investment management or analysis professions, the CFA or CFP may serve a “bona fide business purpose” and is required for the job. The additional education required by the CFA or CFP program can be considered qualified work-related education if the following three requirements are met:
- You need the credential to keep your present salary, status, or job
- The requirement serves a business purpose of your employer
- The education is not part of a program that will qualify you for a new trade or business
This last requirement is frequently the one that trips up many credential-seekers. For example, if you work for a financial services firm, but in a non-investment-related role (such as in information technology or administration), the CFA or CFP is not required for your work. In this case, the credential would qualify you for a new job, and your expenses would not be tax-deductible. Also, if your employer is reimbursing you for your costs, you definitely cannot claim them as expenses on your tax return.
If you are getting more education than your employer (or the law) requires, the additional education provided by the CFA can be considered work-related education only if it “maintains or improves” skills required in your present work. This can be tricky, because, technically, while the CFA or CFP would certainly improve your job-related skills, it could also be seen as qualifying you for a new job.
How to Deduct Your Expenses If You Do Qualify
If you determine that your credential-related expenses are in fact tax-deductible, you can claim them one of two ways:
- If you're a salaried employee, you can deduct them as part of your itemized deductions on Form 1040 Schedule A, but only the part that exceeds 2% of your adjusted gross income.
- If you are self-employed, you should deduct your education expenses directly from your self-employment income. Obviously, this will require having income against which to bill your expenses; this means that those who are currently unemployed may not be able to deduct their expenses.
Now, even if your course or exam expenses don’t qualify for a tax deduction, you’re not completely out of luck. Some CFA and CFP expenses may qualify for the American Opportunity or Lifelong Learning Credit. The determining factor may be whether or not you are taking coursework from a qualified provider and meet the income limits.
The Bottom Line
In short, every CFA and CFP candidate has a different personal and tax situation. If you aren’t sure whether or not your exams and preparation expenses are deductible, it’s worth speaking with a tax specialist.
One thing is for certain, though: you don’t want to be reporting yourself for tax fraud on your annual conduct statement.