U.S. Tax Credit for Higher Education

For many students, higher education after high school is an essential stage in developing professional skills and opening a wide range of career opportunities. At the same time, the cost of higher education is very high and creates a significant financial burden for students and their parents.

The American Opportunity Tax Credit (AOTC) is a federal tax benefit designed to help reduce the cost of qualified education expenses during the first four years of higher education. This benefit may be relevant not only to students studying in the United States, but also to certain U.S. citizens studying outside the United States, including in Israel, where eligibility depends on whether the academic institution is recognized in the United States as an eligible educational institution.

Understanding the AOTC: What You Need to Know About the American Opportunity Tax Credit

The AOTC is a significant tax credit that helps students reduce education costs and makes higher education more accessible for many. Students may receive up to $2,500 per year as a tax credit. If scholarships or grants cover the full tuition before the full $2,500 credit has been used, the student may still be eligible to receive up to $1,000 as a cash refund.

For many U.S. citizens studying in Israel, the refundable portion of the credit may be especially meaningful. Even if they have little or no U.S. tax liability, they may still be eligible for a refund of up to $1,000, subject to certain conditions. It is also important to remember that scholarships and grants must be taken into account when calculating the amount of qualified expenses.

Eligibility Requirements for the AOTC

To be eligible for the AOTC, the student must meet several eligibility requirements:

• The student is pursuing a degree or another recognized educational credential at a recognized higher education institution. In the Israeli context, this generally means that the institution must be recognized for purposes of U.S. federal student aid or otherwise classified as an eligible institution for purposes of the credit. Eligible Israeli institutions include the Technion, University of Haifa, Reichman University, Tel Aviv University, Bar-Ilan University, the Hebrew University of Jerusalem, and Ben-Gurion University of the Negev.
• The student is enrolled at least half-time for at least one academic period that begins during the tax year.
• The students did not complete the first four years of higher education at the beginning of the tax year.
• The student has not claimed the AOTC for more than four tax years.
• The student has no felony drug conviction as of the end of the tax year.

In addition, the Internal Revenue Service (IRS) has established income-based eligibility thresholds for claiming the AOTC. When the student is claimed as a dependent on the parents’ tax return, the parents’ Modified Adjusted Gross Income (MAGI) cannot exceed $180,000 if they file jointly. If their MAGI is above $160,000 but below $180,000, the amount of the credit will be reduced. If it exceeds $180,000, there will be no eligibility for the credit at all. If the student is not claimed as a dependent, the student’s own MAGI cannot exceed $90,000. If the student’s MAGI is above $80,000 but below $90,000, the amount of the credit will be reduced.

How Do You Apply for the AOTC?

The first step is to provide a tuition statement issued by a recognized educational institution, including certain foreign institutions. This is Form 1098-T, which is issued annually, generally by January 31. The form includes information such as the amount of tuition charged, scholarships or grants awarded, and adjustments from prior years. Expenses such as room and board, transportation, health insurance, and optional fees are not included in the credit calculation. Publication 970, Tax Benefits for Education, includes practical examples and guidance on how the rules are applied.

A student may still be eligible for the AOTC even if Form 1098-T was not issued. This may occur, for example, in cases of late enrollment, full tuition coverage through scholarships or grants, or where the student is an international student and the institution does not issue the form. In such cases, the credit may still be claimed if the taxpayer can prove that the student was enrolled at an eligible educational institution and can substantiate the qualified education expenses through appropriate documentation.

In addition to Form 1098-T, the taxpayer must also file Form 8863, which allows the IRS to review the education credits claimed. Both forms must be attached to Form 1040 when filing the tax return.

AOTC vs. Lifetime Learning Credit

Although the AOTC is a good opportunity to obtain some financial relief, it is not the only U.S. tax benefit related to education. Another option is the Lifetime Learning Credit (LLC), which is available for undergraduate studies, graduate studies, and professional training, with no time limit. Unlike the AOTC, the LLC provides a maximum credit of $2,000 per tax return and is non-refundable. This means that it does not generate a cash refund, unlike the AOTC, which allows a partial refund of up to $1,000 and may therefore be especially useful for low- or middle-income taxpayers.

Common Mistakes When Claiming the AOTC

Before claiming the AOTC, it is advisable to carefully consider all procedural steps involved. It is recommended to keep a copy of all documents used to ensure they are not lost during the process. If a previously filed AOTC claim was denied, Form 8862 must also be filed in advance before claiming the AOTC in future years.

The AOTC is an important tool that helps reduce the cost of higher education during the student’s first four years of study. To make full use of the benefit, students and their families should understand this tax mechanism well. Proper documentation and careful compliance with the required procedural steps are essential to help ensure a successful filing.

For U.S. citizens studying in Israel, this means paying particular attention not only to the general IRS rules, but also to documentation issues involving foreign educational institutions and eligibility questions that arise when the studies take place outside the United States.

TaxLink – Our Story

TaxLink is an accounting firm with a team specializing in both U.S. taxation and Israeli taxation. Our practical experience with the Internal Revenue Service (IRS) and the Israel Tax Authority, combined with a deep understanding of the interface between the two systems, allows us to build an end-to-end solution tailored to your case.

Most clients who contact us do so because they are required to file reports in the United States, whether this involves Form 1040, FATCA reporting, FBAR reporting, or investments in U.S. real estate. We manage the process as one coordinated cross-border matter, with the aim of reducing errors, preventing duplication, and assisting in the reduction of double taxation, all within the framework of U.S. law, Israeli law, and the tax treaty between the United States and Israel.

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