Claiming a Continuing Education Tax Deduction While Abroad

September 21, 2022

With expenses rising around the world, many expats are struggling to cover the costs of higher education. Fortunately, the IRS is willing to help. In this guide, we’re looking at two continuing education tax deductions that expats can use to offset their taxes.

What Are Continuing Education Tax Deductions?

Americans pursuing higher education can claim certain deductions and credits to reduce their US tax burden. You may also be able to claim credits if your spouse or dependent is enrolled in a college, university, or other educational institution.

The two main continuing tax deductions available for Americans abroad are the American Opportunity Credit and the Lifetime Learning Credit. Let’s take a closer look at each.

What Is the American Opportunity Credit?

The American Opportunity Credit gives taxpayers a tax credit to cover qualifying education expenses. Eligible taxpayers can reduce their tax liability by a dollar-for-dollar amount based on the amount they can claim under the credit.

The American Opportunity Credit covers 100% of the first $2,000 in adjusted qualified education expenses paid and 25% of any excess beyond that, up to a cap of $500. Thus, the maximum account you can claim under the American Opportunity Credit is $2,500.

This credit is partially refundable. If you don’t owe any taxes—or this credit reduces your tax liability to zero—you can receive 40% of the remaining credit as a refund, up to a cap of $1,000.

Eligibility

If you, your spouse, or a dependent are enrolled in higher education, you may be eligible to claim the American Opportunity Credit. To qualify, all of the following must be true:

• The student has not yet completed four years of post-secondary education
• The student is enrolled in a program that leads to a degree, certificate, or other learning credential
• The student is enrolled at least half-time for one academic semester during the applicable tax year
• The student has never been convicted of a felony drug crime
• The taxpayer claiming the credit has an adjusted gross income of $90,000 or less ($180,000 or less for joint returns)

If you qualify, you can claim the American Opportunity Credit for up to four tax years. Once you have claimed the credit for four years, it is no longer available for that student. However, you can claim it again for another student, such as a spouse or a dependent.

The amount you can claim begins to phase out if your income exceeds $80,000 ($160,000 for joint returns).

Qualified Education Expenses

If eligible, you can claim tax credits to offset the following expenses:

• Tuition, fees, and other enrollment expenses paid to a qualifying educational institution
• Course materials such as books and supplies (this applies even if you did not buy these items from the school)
• Non-academic student activity fees paid to the school as a condition of enrollment

However, the American Opportunity Credit does not cover the following expenses:

• Room and board
• Insurance
• Transportation
• Medical costs (including student health fees)

What Is the Lifetime Learning Credit?

Another continuing education tax deduction for Americans abroad is the Lifetime Learning Credit. Like the American Opportunity Credit, this tax benefit provides a dollar-for-dollar credit for qualifying education expenses. However, the rules for who is eligible and how much you can claim are different.

With the Lifetime Learning Credit, taxpayers can claim a credit of 20% of their adjusted qualified education expenses up to a maximum credit of $2,000. Unlike the American Opportunity Credit, this credit is not refundable.

Eligibility

Qualifying for the Lifetime Learning Credit is much simpler than the American Opportunity Credit. To qualify for this credit, only the following must be true:

• You, your spouse, or a dependent are enrolled in a qualified educational institution for at least one academic period (a semester, trimester, quarter, summer school, etc.)
• You have an adjusted gross income of $69,000 or less ($138,000 or less for joint returns)

The student does not have to be working toward a degree. There is no limit to how many years you can claim this credit, either. However, the $2,000 annual limit applies to each tax return, not each student. This means that if you have multiple members of your family who are eligible for this credit, you can only claim a combined total of $2,000 for all of them per year.

The amount you can claim begins to phase out if your income exceeds $59,000 ($118,000 for joint returns).

Qualified Education Expenses

The qualified education expenses you can claim under the Lifetime Learning Credit are the same as for the American Opportunity Credit. That means you can claim the following expenses:

• Tuition, fees, and other enrollment expenses paid to a qualifying educational institution
• Course materials such as books and supplies (this applies even if you did not buy these items from the school)
• Non-academic student activity fees paid to the school as a condition of enrollment

However, you cannot claim the following expenses:

• Room and board
• Insurance
• Transportation
• Medical costs (including student health fees)

How to Claim a Continuing Education Tax Credit

The process for claiming a continuing education tax credit is the same regardless of whether you claim the American Opportunity Credit or the Lifetime Learning Credit.

At the end of the tax year, the educational institution in question should send you Form 1098-T. This form reports all costs that qualify for a tax credit. To claim your credit, simply follow these brief steps:

1. Using Form 8863, calculate the total credit amount you’re able to claim based on the information from Form 1098-T
2. Transfer the credit to your income tax return
3. File your tax return with Form 8863 attached

And that’s it! You’re all set.

Note: You cannot claim the American Opportunity Credit and Lifetime Learning Credit in the same year for one student. If you are eligible for both, consult a tax professional to learn which is the better choice in your case.

Can I Claim a Continuing Education Tax Deduction without Form 1098-T?

In most cases, you won’t be able to claim either a continuing education tax deduction without Form 1098-T. However, this isn’t always true. You may still be able to claim the American Opportunity Credit or Lifetime Learning Credit if you can prove that you qualify. That proof will include:

• Records of your enrollment at a qualifying educational institution
• Receipts for any qualifying expenses
• Records showing that you are not ineligible for the tax credit for any reason

If you do not currently have this documentation, you may be able to obtain it by contacting the school. Contact a tax professional to learn more.

Get the Answers You Need for Your Expat Taxes

We hope this guide has helped you understand how you can claim a continuing education tax deduction while living abroad. To learn more about your expat taxes—and how you can lower your taxes overseas—just download our free guide: 25 Things You Need to Know About US Expat Taxes.

At Greenback Expat Tax Services, we specialize in helping expats around the world manage their US tax obligations. Just contact us, and we’ll be happy to answer any questions you have.