Tax-Smart College Planning: Strategies for Parents and Students

College tuition has a way of creeping up fast. Whether your kid just started high school or you’re a student footing your own bill, there’s no denying it—higher education is a massive financial commitment. But what most people don’t realize? With the right planning, college costs can come with serious tax perks.



At Andrea Ward CPA, we help families and students make sense of the tax strategies tied to college planning. From 529 savings plans to education credits and smart income strategies, there are more ways than ever to save money on school while also reducing your tax burden. Whether you’re already writing tuition checks or just starting to plan ahead, these tips will help you make the most of your dollars—and stay in the IRS’s good graces while you’re at it.

Start With a 529 Plan: The Tax-Friendly Favorite

A 529 plan is one of the most popular tools for college savings—and for good reason. It’s simple, flexible, and packed with tax benefits.

What is it? A 529 plan is a state-sponsored investment account that lets you save for education expenses. Earnings grow tax-deferred, and withdrawals are tax-free when used for qualified education costs like tuition, books, and even room and board.

Why it matters:

• Contributions may be deductible on your state return (depending on your state)
• Withdrawals for eligible expenses aren’t taxed at all
• You can front-load up to five years of contributions with no gift tax consequences

Example: One of our clients started a 529 plan for their daughter when she was 10. By the time she graduated high school, the account had grown significantly—and every dollar used for tuition came out tax-free.



Heads-up: Funds must be used for qualified education expenses. If you withdraw for non-qualifying costs, earnings will be subject to income tax and a 10% penalty.

Don’t Miss the American Opportunity Credit

This credit offers a big boost for undergrad students. It covers up to $2,500 per student per year for the first four years of post-secondary education.

How it breaks down:

• 100% of the first $2,000 of qualified expenses
• 25% of the next $2,000

That means if you spend $4,000 in qualified expenses, you’re eligible for the full $2,500 credit.

Eligibility:

• Student must be enrolled at least half-time
• Must be pursuing a degree or recognized credential
• Income limits apply (starts phasing out above $80,000 for single, $160,000 for joint filers in 2024)



Real-life note: We worked with a family putting two kids through college. By strategically claiming the credit for each child, they shaved $5,000 a year off their tax bill.

The Lifetime Learning Credit: Flexible but Different

Unlike the American Opportunity Credit, the Lifetime Learning Credit (LLC) isn’t limited to undergrads or four years. It covers:

• Grad students
• Part-time students
• Professional development

You can claim up to $2,000 per tax return (20% of the first $10,000 in qualified expenses).



But here’s the catch:

• Income limits are tighter (phaseout begins at $80,000 for single filers)
• You can’t claim both the LLC and the AOC for the same student in the same year

Pro tip: If you have multiple family members in school, you may be able to mix and match who gets which credit, depending on your tax situation.

Timing Matters: Coordinate 529 Withdrawals and Credits

This is where many families accidentally miss out. You can use both a 529 plan and claim a tax credit in the same year —but you can’t double-dip on the same expenses.

Example: You use $4,000 of 529 money to pay tuition, then try to claim the American Opportunity Credit on that same $4,000. Doesn’t work.

The fix? Use 529 funds for room, board, and other costs—then use out-of-pocket funds for tuition so you can claim the credit.



Client scenario: One of our clients had $20,000 in tuition expenses. We advised them to use $4,000 of their own funds to unlock the full AOC credit, then use the 529 plan for the rest. That one move saved them $2,500 in taxes.

Don’t Overlook the Student Side of Things

Students filing their own returns? They may be eligible for credits too—depending on income. But coordination is key. If the parent claims the student as a dependent, the parent gets the credit.



Tips for students:

• Track all education-related expenses
• Keep copies of Form 1098-T from your school
• Know your dependency status before filing

And if the student works part-time? They might owe taxes on that income—but could also contribute to a Roth IRA, which grows tax-free for retirement.

Little-known bonus: Contributions to a Roth IRA don’t impact financial aid the way parent-owned assets can. It’s a nice long-term savings play for responsible students.

Use Income Strategies to Stay Under Phaseouts

Credits and deductions phase out as your income rises. So if you're close to the limit, talk to a CPA about strategies to reduce your Adjusted Gross Income (AGI):

• Max out retirement contributions
• Delay bonuses or freelance income
• Harvest investment losses



We helped one high-earning couple move a freelance payment to January and increase their 401(k) contributions. That small shift kept them eligible for $5,000 in education credits.

FAFSA and Taxes: How They Connect

The Free Application for Federal Student Aid (FAFSA) uses tax info from two years prior (called the "prior-prior year"). That means tax decisions you make today affect financial aid eligibility down the road.

Example: If your child will be in college in 2026, your 2024 tax return will be the one used for their FAFSA.



Planning tip: Reducing reportable income now, shifting assets from the student to the parent, and being strategic with capital gains can improve aid eligibility.

Grandparents Can Help—But Timing Is Key

Grandparents often want to help, and 529 plans are a great tool for that. But there’s a twist.

Before 2024, if a grandparent paid tuition directly or made 529 withdrawals, it counted as untaxed income to the student—which could reduce financial aid eligibility.



Good news: As of the 2024-25 FAFSA simplification, grandparent 529 withdrawals no longer count as student income. So now is a great time for grandparents to get involved.

Final Thoughts: Education Is Expensive, But Tax Planning Helps

Paying for college is no small feat. But with the right strategy, you can lower your tax bill while funding a brighter future.

Whether you’re just opening your first 529, trying to qualify for education credits, or figuring out how to support a college student without hurting their financial aid, a little guidance goes a long way.

At Andrea Ward CPA, we love helping families and students get ahead—without overpaying Uncle Sam. Tax-smart college planning isn’t about cutting corners. It’s about using the tools available to make smarter, more informed decisions.

Because when it comes to education, knowledge really is power—especially when it saves you money.