Using Educational Tax Benefits to Lower US Expat Taxes

October 8, 2024 | | 3 minute read
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Updated November 5, 2024

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Updated November 5, 2024

Students Walking and Talking about Educational Tax Benefits

Congratulations on becoming a student who is living abroad! With secondary education generally being quite expensive worldwide, the IRS has offered educational tax deduction benefits to help offset some of your expenses. This guide will break down some essential tax benefits for US expats studying abroad.

American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit (AOTC) is a credit student can claim on their taxes. It allows students in their first four years of higher education to receive $2,500 off their tax liability. You can receive up to 40% of the AOTC as a refundable credit if you owe zero taxes to the IRS.

To qualify for the AOTC, you must meet a list of requirements. This educational tax benefit requires you to be a part-time or full-time student in an accredited degree program or recognized education credential. Those who have already completed a four-year post-secondary education will no longer be eligible for this credit. Moreover, you will not receive full credit if your income threshold exceeds $80,000 as a single filer or $160,000 as a joint filer.

You can only include expenses such as tuition fees, books, supplies, and required course equipment. Otherwise, every other non-educational expense will not be covered under the AOTC expenses.

Lifetime Learning Credit (LLC)

The Lifetime Learning Credit (LLC) is a nonrefundable tax credit that allows you to exclude up to $2,000 from your tax liability per year. Students enrolled in part-time or professional developmental educational programs can still qualify for this credit. Additionally, unlike the AOTC, the LLC can be used for an unlimited number of years.

You can only claim the Lifetime Learning Credit LLC if you have expenses such as tuition and material requirements for enrollment. In addition to the qualified educational expenses, only 20% of the first $10,000 is considered for the LLC. The LLC does not include non-educational expenses like housing, insurance, or medical expenses.

To qualify, your modified adjusted gross income (MAGI) must be less than $80,000 as a single filer or $160,000 as a joint filer to receive the whole credit. Anything MAGI above $90,000 as a single filer or $180,000 as a joint filer will not be eligible for this credit. Furthermore, if your tax liability is already zero, the LLC will not result in a refund as it is a non-refundable credit.

Student Loan Interest Deduction

Additionally, US expats with student loans can benefit from the Student Loan Interest Deduction. This deduction allows you to claim up to $2,500 of interest paid on qualified student loans. You do not need an itemized deduction list on your tax return to claim this education tax deduction.

To qualify, you must have an educational loan solely to pay for your qualified education expenses. This includes books, tuition, fees, and other necessary educational supplies. Furthermore, your loan must require you to pay interest on your educational loan.

Your MAGI also plays a role in your eligibility. To receive the full deductible, your MAGI must be below $75,000 for single fliers and $155,000 for joint filers. Anything above these MAGI amounts will result in the deduction phasing out until you no longer qualify.

Which Credit Is Better?

If you’re trying to choose between these educational tax deduction benefits, it’s best to choose the AOTC as it is partial refundable. However, the AOTC can only be claimed for your first four-year degree. If you have already completed your first educational degree, you will not qualify for the AOTC. This is when the LLC would be the better option for you.

Regarding the Student Loan Interest Deduction, you can lower your taxable income and use either the AOTC or LLC if you have a student loan. Therefore, the Student Loan Interest Deduction is useful for either educational tax benefits.

Can I Claim Education Credits If I Have a 529 Plan?

A 529 plan is a savings plan for your future educational expenses. The two most common 529 plans are the College Savings and Prepaid Tuition Plans. Both have great benefits for future students, and they can be used with your educational credits. Although, you cannot use a tax-free 529 plan withdrawals with your educational credits for the same expenses.

How to Claim Education Tax Benefits

When you want to claim your educational tax benefits, you will need to ensure you have these documents:

  1. Form 1098-T: Receive this form from your educational institution. It will list all your qualified education expenses.
  2. Form 8863: Complete this form to calculate your credit for either the AOTC or LLC.

Once these documents are filled out, you can attach them to Form 1040 before submission.

What If I’m Behind on My US Tax Returns?

If you haven’t filed or did not know you needed to file since moving abroad for your education, you can still claim your educational tax benefits. The Streamlined Procedure allows you to claim not only your prior educational credits but up to three past tax returns and six foreign bank account reports (FBARs) to become tax-compliant, free of penalties.

Claim Your Educational Benefits Today!

Filing US taxes as an American student living abroad can be challenging. Fortunately, you could qualify for educational tax benefits and deductions such as the AOTC and LLC. With US taxes being a mandatory duty for all Americans, make sure you claim every credit possible, especially as an expat!

If you need assistance with anything tax-related, consult one of our Tax Professionals at MyExpatTaxes to ensure you’re claiming all your educational tax benefits while staying in good graces with the IRS.

Nathalie - CEO and Co-Founder

Written by Nathalie Goldstein, EA

Nathalie Goldstein, EA is a leading expert on US taxes for Americans living abroad and CEO and Co-Founder of MyExpatTaxes. She contributes to Forbes and has been featured in Forbes, CNBC and Yahoo Finance discussing US expat tax.

October 8, 2024 | | 3 minute read

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