Pursuing higher education or professional development can expand your knowledge and career opportunities while providing significant tax advantages. The IRS offers two key tax credits for eligible educational expenses, including for students studying abroad. This guide details these benefits, their eligibility requirements, and how to claim them.

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Overview of Education Tax Credits

The two primary tax credits available are:

1. American Opportunity Tax Credit (AOTC):
   • Offers up to $2,500 per eligible student for the first four years of post-secondary education.
   • Covers 100% of the first $2,000 in qualified expenses and 25% of the next $2,000.
   • Partially refundable: If your tax liability is reduced to zero, up to $1,000 of the remaining credit can be refunded.
2. Lifetime Learning Credit (LLC):
   • Provides a 20% credit on the first $10,000 of qualified expenses, up to $2,000 annually.
   • Has no cap on the number of years it can be claimed.
   • Non-refundable: Can reduce tax owed to zero but will not result in a refund.

Both credits aim to reduce the financial burden of continuing education, making learning more accessible and affordable.

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Eligibility Requirements

To qualify, you must meet the following general criteria:

• The student is you, your spouse, or a dependent.
• The student is enrolled at an eligible educational institution.
• Qualified education expenses are paid by you, the student, or a third party.

AOTC Eligibility:

• The student must be pursuing a recognized degree or credential.
• Enroll at least half-time for one academic period during the tax year.
• Have not completed the first four years of higher education before the tax year begins.
• Have not claimed the AOTC or the Hope Credit for more than four tax years.
• Cannot have a felony drug conviction by the end of the tax year.

LLC Eligibility:

• Available for courses that improve job skills or lead to a degree.
• Enrollment in at least one academic period at an eligible institution is required.

Note: Both credits have income thresholds that determine eligibility based on your Modified Adjusted Gross Income (MAGI).

	Full Credit	Partial Credit	Ineligible
Individual filer	$80,000 or less	Between $80,000 & $90,000	$90,000+
Married filing jointly	$160,000 or less	Between $160,000 & $180,000	$180,000+

 

Keep in mind that the AOTC and LLC each have slightly different educational requirements.

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What Qualifies as Educational Expenses?

Qualified expenses for the AOTC and LLC include:

• Tuition
• Required fees
• Books, supplies, and equipment necessary for coursework

However, these credits do not cover:

• Room and board
• Insurance or medical expenses (including student health fees)
• Personal or living expenses (e.g., transportation or meal plans)

Expenses for sports, hobbies, or non-credit courses are generally ineligible unless they are part of a degree program. For example, a kinesiology major taking a basketball class required for their program may qualify, while an elective basketball course for a computer science major would not.

Additionally, education expenses paid with tax-free funds, such as scholarships or grants, cannot be claimed for the AOTC.

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How to Claim These Credits

1. Obtain Form 1098-T from your educational institution. This form lists amounts paid for tuition and eligible fees.
2. Document other qualifying expenses not included on Form 1098-T, such as books purchased separately.
3. Complete IRS Form 8863 to calculate your credit, then attach it to your Form 1040.
4. Report the credit on your tax return:
   • AOTC: Line 29 of Form 1040
   • LLC or other non-refundable credits: Line 3 of Form 1040

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Special Considerations for Expats

For students attending foreign institutions, additional steps include:

• Verifying the institution’s eligibility: Foreign schools must participate in the U.S. Federal Student Aid program.
• Providing proof of payment for tuition and fees if the institution does not issue Form 1098-T.
• Converting foreign currency expenses into U.S. dollars using a reliable conversion tool.

Expats should also consider how these credits interact with other tax benefits like the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC).

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Maximizing Your Credits

• Choose Wisely: While the AOTC offers a higher limit and refundability, the LLC’s flexibility may be better for part-time students or those beyond their fourth year of study.
• Time Your Expenses: Plan large purchases, like a laptop, for a new tax year if you’ve already maxed out your credits for the current year.
• Coordinate with Other Tax Strategies: Combine education credits with retirement contributions, deferring foreign income, or tax-loss harvesting to optimize savings.

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Need Help?

Navigating tax benefits for education can be complex, especially for expats. PSA CPA is here to help you leverage these opportunities to minimize your tax liability. Contact us at 301-879-0600 or contact@psacpa.com for expert assistance.