What Are Qualified Education Expenses?
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Table of Contents
What types of school costs can be used for tax benefits?
Certain school-related expenses can qualify for tax breaks if they meet the IRS’s definition of “qualified education expenses.” These typically include tuition, enrollment fees, and any books or materials required by the school.
If the cost is necessary for enrollment and directly tied to coursework, it may qualify. However, expenses like travel, personal items, or insurance usually don’t count.
Can Americans living abroad still claim education tax benefits?
Yes, US citizens living overseas can still qualify for education-related tax credits if they meet the basic requirements.
There are two main credits to be aware of:
- American Opportunity Tax Credit (AOTC): This is designed for undergraduate students in their first four years of college. It covers tuition and required course materials, and can lower your tax bill by up to US$2,500 per student each year.
- Lifetime Learning Credit (LLC): This option is broader and applies to graduate studies, career training, or part-time education. It covers tuition and required fees, with a credit of up to US$2,000 per tax return.
Even if you’re living abroad, you may be able to use either of these—depending on where the student is enrolled.
Can you use these credits if the school is in another country?
In some cases, yes.
The school doesn’t need to be located in the US, but it must be recognized by the US Department of Education as an eligible institution.
Many well-known foreign universities and colleges are on this list. If the school isn’t eligible, though, you won’t be able to claim either credit. It’s always a good idea to check the list before enrolling or making payments.
Is it possible to claim tax benefits if your child is studying abroad?
Yes, you can still qualify for certain tax credits even if your child is attending school in another country—but there are some conditions:
- The school must be on the approved list: Not every international school qualifies, so it’s important to verify its eligibility with the US Department of Education.
- You’ll need your own records: Foreign schools usually don’t send the 1098-T form that US schools provide. Instead, keep receipts and enrollment confirmations as proof of payment.
- Only some costs can be included: You can only claim direct academic expenses—like tuition and course-related fees. Travel, food, and housing usually don’t count.
- The student needs to be enrolled properly: For AOTC, the student must be working toward a degree and be enrolled at least half-time.
What other education-related tax breaks are available if you’re abroad?
Beyond tax credits, there are a few other ways US expats can reduce their taxes if they’re paying for education:
1. Student Loan Interest Deduction
If you’re paying back a student loan, you may be able to deduct up to US$2,500 of interest paid during the year. This applies even if you’re living overseas, as long as:
- The loan was taken out to pay for education.
- The student was enrolled at least half-time.
- Your income doesn’t exceed the IRS limit (phaseout begins at US$80,000 for individuals, US$165,000 for joint filers).
2. Education Savings Bonds
If you’ve cashed in Series EE or I savings bonds and used the money for tuition or enrollment fees, you may not have to pay tax on the interest earned—provided:
- The bond owner was at least 24 when the bond was issued.
- The money went to an eligible school.
- Your income stays within the phaseout limits (which begin at US$96,800 or US$145,200 if filing jointly).
3. 529 Plan Withdrawals
If you’ve been saving through a 529 college savings plan, you can use the funds tax-free for qualifying education expenses—including at some international schools.
Covered costs include:
- Tuition and fees
- Books and required supplies
- Room and board (if the student is at least half-time)
Not all foreign schools qualify under 529 rules, so double-check before using the money.
Which education costs are not allowed for tax savings?
There are several common education-related expenses that do not qualify for credits, deductions, or tax-free withdrawals:
- Travel or transportation (like flights, buses, or gas)
- Medical expenses and health insurance
- Dorm décor, electronics, or clothing
- Sports and extracurricular fees not tied to coursework
- Courses that don’t lead to credit or certification
Even if these are necessary while studying abroad, they don’t meet the IRS’s definition of qualified education expenses.
We’ll help you claim education tax benefits. Connect with a tax professional today.
What should Americans abroad keep in mind when handling education costs and taxes?
Many foreign schools won’t provide the forms US institutions do, so you’ll need to save all payment records, proof of enrollment, and course-related documentation yourself.
It’s also important to check whether the school qualifies under IRS rules before making large payments—especially if you’re planning to use tax credits or 529 withdrawals.
For accountants helping expats, the most important steps are verifying school eligibility, reviewing the student’s enrollment status, and confirming which expenses are allowed. With the right paperwork and planning, it’s possible to make full use of the available education tax benefits—even from abroad.
What types of expenses can you actually pay for using a 529 plan?
If you’re using a 529 savings plan to help cover education costs, the money must go toward approved expenses to avoid taxes and penalties. These accounts are designed for education, but not everything tied to school qualifies.
Here’s what’s usually allowed:
- Tuition and required school fees for college, vocational schools, and other eligible institutions
- Textbooks, supplies, and equipment that the school requires for your classes
- Computers, software, or internet—if the student needs them for schoolwork
- Housing and meals, but only if the student is enrolled at least half-time and the costs don’t exceed the school’s official estimate
- Special education services or tools needed for students with disabilities
- K-12 tuition, up to US$10,000 per year for private or religious elementary and high schools
- Registered apprenticeship programs, including supplies and tools
- Student loan repayment, limited to US$10,000 for the plan’s beneficiary or a sibling
How can you figure out which expenses actually qualify?
To get a clear number on what you can claim or withdraw tax-free, you’ll need to do a quick breakdown:
- List all education-related costs—start with tuition, books, and anything your school requires
- Ignore costs that don’t count, like travel, personal items, or optional extras
- Factor in scholarships or grants—if you got financial aid that doesn’t need to be paid back, you can’t also count those same expenses
- Know the yearly limits—some tax benefits or savings plans cap how much you can use or claim each year
For example, if your child gets a US$5,000 scholarship and their tuition is US$10,000, only US$5,000 would be eligible for coverage through your 529 account.
What if you use the money on things that aren’t allowed?
Using your 529 funds for non-qualified expenses—like travel, clothing, or insurance—comes with tax consequences. You’ll owe income tax on the earnings portion of that withdrawal, plus an additional 10% penalty.
However, there are a few exceptions to the penalty:
- The student received a scholarship that reduced the need for the 529 funds
- The student attends a US military academy
- The student becomes disabled or passes away
Unless one of those exceptions applies, using the funds for anything unrelated to school will cost you at tax time.
What can you do if there’s money left in the 529 account?
If there’s still money in the account after college or training is done, you don’t have to rush to take it out. There are a few smart ways to use the leftover balance:
- Transfer it to another family member—siblings, cousins, or even yourself if someone else plans to go back to school
- Move it into a Roth IRA—starting in 2024, you can transfer up to US$35,000 into a Roth IRA (as long as the account has been open for 15+ years)
- Use it to help pay off student loans, up to US$10,000
- Keep the money in the account, in case the student goes to graduate school later
If you take the money out for general use, expect to pay both income tax and a penalty on the earnings portion.
What is considered a “qualified” education expense at the college level?
For college or university students, the IRS has a list of what’s considered a necessary cost:
- Tuition and required enrollment fees
- Books, materials, and supplies that are part of the class
- Housing and meals, if the student is at least half-time and the amount fits within the school’s cost-of-attendance estimate
- Technology (computer, internet) needed for assignments or research
- Student activity fees, if they’re required by the school
Not every school qualifies, though. To be sure, the school must be officially recognized by the US Department of Education. That includes many foreign universities, but not all.
How do these education expenses impact your US tax return?
When used correctly, education expenses can lower your US tax bill in a few different ways:
- Education tax credits: The American Opportunity Credit (AOTC) and Lifetime Learning Credit (LLC) help offset tuition and course fees
- Student loan interest deduction: If you’re paying off a student loan, up to US$2,500 in interest may be deductible—even while living abroad
- 529 plan withdrawals: If you stay within the rules, you can use these funds without paying tax on the earnings
- State tax benefits: Some states give a deduction or credit when you contribute to a 529 plan, even if you live overseas
- Scholarships and grants: These are usually tax-free if used for tuition or other qualified costs
You may need to file IRS Form 8863 for education credits and keep a record of what was paid. If you’re working with a tax preparer, let them know if the school is outside the US and whether you received a 1098-T form—foreign schools typically don’t provide one.
