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Millions of dollars in college tax benefits go unclaimed every year. Through our partnership with College Planning TODAY Services, Suber Services helps families uncover scholarships, maximize tax benefits, and navigate essential college planning resources
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7 College Tax Credit Mistakes Parents Make
College is expensive enough without leaving money on the table come tax time. Yet every year, thou-
sands of parents miss out on valuable education tax credits simply because they don't know the rules,
or worse, they accidentally break them.
If you're sending a kid to college (or about to), you need to know these seven mistakes before you
file your 2025 taxes. Trust me, the IRS isn't going to give you a do-over if you mess this up.
Mistake #1: Not Claiming Your Student as a Dependent
Here's the deal: Only the person who claims the student as a dependent can claim education tax
credits. It doesn't matter who actually wrote the tuition check.
This trips up divorced parents all the time. Mom pays $15,000 in tuition, but Dad claims the kid as a
dependent per their divorce decree. Guess who gets to claim the American Opportunity Tax Credit?
That's right, Dad gets the credit, even though he didn't pay a dime.
The fix: Before you pay those college bills, make sure you know who's claiming your student as a de-
pendent. If you're divorced, this should be clearly spelled out in your agreement. If you're married fil-
ing jointly, you're good to go.
And here's something most people don't know: Your student must pass the support test, meaning
you provide more than half their financial support during the year. Room, board, tuition, books, even
their car insurance counts toward this calculation.
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Mistake #2: Earning Too Much to Qualify (And Not Knowing It)
The American Opportunity Tax Credit starts phasing out when your modified adjusted gross in-
come (MAGI) hits $80,000 if you're single, or $160,000 if you're married filing jointly. Hit $90,000
($180,000 for joint filers) and you're completely shut out.
The Lifetime Learning Credit has even lower limits, it phases out starting at $59,000 for single filers
and $118,000 for joint filers.
The fix: Before you pay those college bills, make sure you know who's claiming your student as a de-
pendent. If you're divorced, this should be clearly spelled out in your agreement. If you're married fil-
ing jointly, you're good to go.
And here's something most people don't know: Your student must pass the support test, meaning
you provide more than half their financial support during the year. Room, board, tuition, books, even
their car insurance counts toward this calculation.
Mistake #3: The Double-Dipping Trap
This is where things get sneaky. You cannot use the same college expenses to claim both a tax-free
529 distribution AND an education tax credit. The IRS calls this "coordination,"
and they're watching.
Here's what happens: You withdraw $10,000 from your 529 plan to pay tuition, then try to claim the
American Opportunity Credit using that same tuition payment. The IRS will make you pick one or the
other, and recalculate everything. The smart move: Reserve about $4,000 in annual college expenses to be paid with cash, loans, or other non-529 money. Use this for your tax credit. Then use 529 distributions for the remaining quali-
fied expenses like room and board.
Think of it this way, you want to maximize both benefits, not accidentally cancel one out.
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Mistake #4: Mishandling Scholarships and Grants
Your kid got a $5,000 scholarship? Congratulations! Now don't mess up the tax implications.
Here's the key: Students can choose how to allocate their scholarships. They can apply scholarships
toward tuition and fees (tax-free), or toward room and board (taxable income to the student, but
opens up more expenses for parent tax credits).
Most families automatically apply scholarships to tuition because it's tax-free. But sometimes it's bet-
ter for the student to report some scholarship money as taxable income, leaving more tuition expens-
es available for parents to claim education credits.
Example: Your student receives a $4,000 scholarship and has $8,000 in tuition. If they apply the
scholarship to tuition, you can only claim credits on the remaining $4,000. But if they allocate the
scholarship to room and board instead, you can claim credits on the full $8,000 tuition (while they
pay taxes on the $4,000 scholarship income: usually at a much lower rate).
Run the numbers both ways to see which saves your family more money overall.
Mistake #5: Saving Money in the Wrong Name
This isn't exactly a tax credit mistake, but it'll cost you money: potentially a lot of it.
Never save for college in your child's name through custodial accounts (UTMA/UGMA). Student-
owned assets reduce financial aid eligibility by 20% each year. Meanwhile, parent-owned assets are
only assessed at a maximum rate of 5.64%.
Translation: If your kid has $10,000 in their name when they apply for financial aid, they'll be expected
to use $2,000 of it for college costs. If you have that same $10,000 in your name, you'll only be expected to contribute about $564.
The fix: Use parent-owned 529 plans instead. The money grows tax-free, withdrawals for qualified expenses are tax-free, and the assets are treated favorably for financial aid purposes.
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Mistake #6: Grandparent-Owned 529 Plans
Grandparents love to help with college costs, but their good intentions can backfire if they're not
careful about account ownership.
The problem: When grandparents own a 529 plan and make distributions to pay college expenses,
those distributions count as untaxed student income on the next year's FAFSA. This can reduce financial aid eligibility by up to 50% of the distribution amount.
So Grandma's generous $10,000 529 distribution could cost your family $5,000 in financial aid the following year.
Better strategies:
• Have grandparents contribute to parent-owned 529 plans instead
• Wait until after January 1st of the student's sophomore year to take grandparent 529 distributions
(won't affect aid for remaining years)
• Consider having grandparents pay student loans after graduation instead
Example: Your student receives a $4,000 scholarship and has $8,000 in tuition. If they apply the
scholarship to tuition, you can only claim credits on the remaining $4,000. But if they allocate the
scholarship to room and board instead, you can claim credits on the full $8,000 tuition (while they
pay taxes on the $4,000 scholarship income: usually at a much lower rate).
Run the numbers both ways to see which saves your family more money overall.
Mistake #7: Ignoring Education Tax Benefits Entirely
This is the biggest mistake of all: simply not taking advantage of available tax breaks.
The American Opportunity Tax Credit is worth up to $2,500 per student for the first four years of
college. Up to $1,000 of this is refundable, meaning you can get money back even if you don't owe
taxes.
The Lifetime Learning Credit provides up to $2,000 per tax return (not per student) for any level of
post-secondary education, including graduate school and professional development courses.
The tuition and fees deduction was eliminated for 2021 and beyond, but other education-related
deductions may still apply.
Beyond tax credits, make sure you're using tax-advantaged accounts like 529 plans and Coverdell
Education Savings Accounts. The tax-free growth on these accounts can save you thousands over
time.
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What You Need to Do Right Now
Don't wait until you're sitting in front of your tax preparer to figure this out. Here's your action plan:
Before filing your 2025 taxes:
• Gather all 1098-T forms from your student's school
• Review who claimed your student as a dependent
• Calculate your MAGI to see which credits you qualify for
• Separate 529 expenses from out-of-pocket education expenses
• Consider whether reallocating scholarships might save you money
For future years:
• Set up parent-owned 529 plans if you haven't already
• Coordinate with grandparents on college funding strategies
• Plan income timing around education credit phase-out limits
Most importantly: Don't try to navigate this alone if your situation is complex. The interaction be-
tween financial aid, taxes, and college funding can be tricky. A qualified tax professional who under-
stands education planning can easily save you more than their fee.
The bottom line? College is expensive, but it doesn't have to be more expensive than necessary.
Avoid these seven mistakes, and you'll keep more money in your pocket: money that can go toward next semester's bills instead of the IRS.
Need help sorting through your specific situation? The team at Suber Services has been helping families maximize their education tax benefits for years. Don't leave money on the table (especially when it comes to your kid's education.)