About Those (Not So) Free Bar Expenses…

Just about now, the bar prep companies are starting to market to 3Ls. If there’s one big winner in this game, it’s Barbri. Everyone uses Barbri! When those scores come around in October, you certainly don’t want to be the one who shuts up when all your law firm colleagues are smiling away. So why not just go with the tried and true and play it safe? The firm’s paying and it’s free, right? Wrong.

Here’s the truth: Bar expenses are not free even if your firm pays for them because you are going to be on the line for a substantial amount of taxes. The money your firm pays for your bar prep course, bar travel and fees (and any other reimbursement they offer other than moving costs) is considered taxable income and will come off your first paycheck just when you least expect it. Yeah, when you rip open that first paycheck expecting the 000s to start ringing like a cash register (ka-ching, ka-ching), you’re in for quite a shock. Your reimbursed expenses are going to cost you probably a minimum of $2,000 in extra taxes, perhaps more.

Taxes is one area that evolution just forgot to program your brain for.[1] While hunting antelope in the Serengeti may have been taxing, fiscal taxation is a more modern invention. (You should be shredding this paper about now for allowing such a gruesome pun to be printed.) Fortunately, tax lawyers are here at the forefront of evolution and this one did not forget about his Homo sapiens cousins. So how should you be thinking about firm-reimbursed expenses? You should assume that you’re going to be on the hook for at least 30-35% of any reimbursed expense – other than moving costs – in extra federal, state, and local taxes. If you have other income during the year, or start working in early September, that number could rise to over 40%.

Let’s say you’re a sheep, you follow the Barbri herd, and Barbri shears its $3,695 “firm decision” sticker price off your firm’s balance sheet. At 35% in total taxes, that’s going to run you $1,293.25 in extra taxes. At 42%, that becomes $1,551.90. If you chose to sign up for Themis at the early bird stage for a more reasonable $1,400, those numbers would be a far more manageable $490 or $588 respectively, or close to $1,000 in savings.

At this point, I hope you’re considering being a black sheep and leaving the herd. Besides, I think Themis is a much better program anyway. I found it quite user friendly and its pass rates are great. I especially liked how Themis chunks up the videos into manageable chunks with short review quizzes at the end. Barbri, for comparison, dumps a four hour lecture on property law on you – I certainly hope your attention span has been improving from all that (unnoticed) surfing on the second to back row during classes.

While we’re at it, it’s worth being aware that the rest of your reimbursement will be taxed as well. If your firm gives you $2,500 for a broker’s fee, pays for your bar hotel and travel, and other odds and ends, you’re going to be on the hook for taxes. These expenses commonly exceed $6,000, and Uncle Sam will graciously take 30-40% off your first paycheck. So keep in mind when you look for airfare, sign up for a bar course, or make other reimbursed discretionary spending decisions, that while the firm pays 100% now, you’re going to pay 30-40% later. And don’t be a sheep.[2]

[1] And if it had, I’m sure some enterprising psychologist would have generated some pat explanation for why it conferred an evolutionary advantage in the days of Hammurabi, or Ice Man, or whomever, and we would all nod our heads in understanding at her TED talk.

[2] Or at least be a black one.

Joseph Gerstel is a 2017 graduate of Harvard Law School. He is working in tax law as a law clerk in a law firm.