Tax Aversion Therapies · for students and the parents paying for college
Diagnosis: a Form 1098-T that doesn’t match the bills, a 529 that paid for the dorm, a scholarship that was bigger than tuition, and a 19-year-old who filed first.
Prognosis: a $2,500 credit, if the pieces are arranged in the right order.
There is no cure for tuition. These are the therapies.
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College is the one expense where the order of payments changes the tax. The same $30,000 of tuition and room and board can produce a $2,500 credit and tax-free 529 withdrawals, or a $0 credit and taxable 529 earnings, depending on which dollars are assigned to which expense and who claims the student. The 1098-T the school sends is a starting point and is frequently wrong about the year.
Below are the nine therapies, in the order a family meets them: the credits, the 529, financial aid, loans, and the question of whose return the student goes on. The contraindications at the end are the coordination rules, which is where self-prepared returns lose the credit.
Dose: 100% of the first $2,000 and 25% of the next $2,000 of tuition, fees and required books: $2,500 per student per year, $1,000 of it refundable; four tax years per student; at least half-time in a degree program; phases out between $80,000 and $90,000 single, $160,000 and $180,000 joint (not indexed).
The four years are tax years, not academic years, so a student who starts in August and graduates in May has five tax years and can use the credit in the four with the most expenses. Books and supplies count even if bought off campus. The student’s SSN and the school’s EIN from the 1098-T are required; a student with a felony drug conviction is ineligible. Full article: Education Tax Credits.
↑ Back to topDose: pay the first $4,000 of tuition from checking; pay everything else from the 529. Result: the full $2,500 credit and tax-free 529 withdrawals.
The same dollar of tuition can’t support both the credit and a tax-free 529 withdrawal. If the 529 pays all $30,000, the credit is computed on tuition reduced by the $4,000 the credit needs, and the earnings on $4,000 of the withdrawal become taxable (no penalty). The fix is arithmetic: carve out $4,000 of tuition for the credit, let the plan pay room and board and the rest. Families with the whole bill on autopay from the plan lose $2,500 a year for four years.
↑ Back to topDose: 20% of up to $10,000 of tuition and fees per return (not per student): $2,000; nonrefundable; no half-time or degree requirement; unlimited years; same phase-out as the AOTC.
Graduate school, a fifth undergraduate year, a single course to keep a license, a parent going back part time. Books count only if paid to the school as a condition of enrollment. One credit per student per year: a family with one student in year five takes the LLC; a family with two students can take the AOTC for one and the LLC for the other.
↑ Back to topDose: tax-free withdrawals for tuition, fees, books, supplies, a computer and internet, room and board up to the school’s cost of attendance (for half-time students), K–12 tuition up to the new annual limit, apprenticeship costs, and $10,000 lifetime of student loan payments; withdrawals must be taken in the same calendar year as the expense.
The December problem: spring tuition billed in December and paid from the 529 in January is a withdrawal in one year and an expense in another. Match them. Off-campus rent counts up to the school’s published room-and-board figure. A withdrawal paid to the student or the school (not the parent) keeps the 1099-Q in the student’s name, where any taxable earnings are taxed at the student’s rate. Leftover money: change the beneficiary to a sibling, or roll up to $35,000 to a Roth IRA for the beneficiary after the account is 15 years old. Full article: Education Beyond the Credits.
↑ Back to topDose: a 529 owned by a grandparent is not reported on the FAFSA, and distributions from it are no longer counted as the student’s untaxed income; a parent-owned 529 counts as a parent asset at up to 5.64%.
Under the old form, a grandparent’s 529 withdrawal cut the next year’s aid by half its amount; grandparents were told to wait until junior year. That penalty is gone. A grandparent who wants to help can now own the account, take Colorado’s subtraction for contributions, keep control, and pay the school directly without hurting aid. Direct tuition payments by a grandparent are also outside the gift tax entirely; see Gift Tax Returns.
↑ Back to topDose: a scholarship is tax-free to the extent of tuition, fees and required books; the part that pays room and board is taxable to the student. A family can choose to treat the scholarship as paying room and board, making it taxable to the student at the student’s low rate, so the tuition is “paid” by the family and supports the AOTC.
A $10,000 scholarship against $12,000 of tuition leaves $2,000 of tuition for the credit: $2,000 credit. Allocating $4,000 of the scholarship to room and board instead leaves $6,000 of tuition for the credit ($2,500) and gives the student $4,000 of taxable income, usually taxed at zero after the student’s standard deduction. The scholarship terms must not restrict it to tuition. Net: $500 more credit for the family, no tax to the student.
↑ Back to topDose: up to $2,500 of student loan interest deductible above the line, phasing out between $85,000 and $100,000 single / $175,000 and $205,000 joint (verify 2026 range); and an employer may pay up to $5,250 a year of an employee’s student loans tax-free, made permanent by the 2025 act.
The interest deduction belongs to whoever is legally liable and pays it; a parent who pays a child’s loan (in the child’s name) can’t deduct it, and neither can the child if claimed as a dependent. Forgiveness of student loans is excluded from income through 2025 under ARPA; the 2025 act extended the exclusion for death and disability discharges and the treatment of other forgiveness after 2025 should be checked (verify post-2025 treatment of IDR and PSLF forgiveness).
↑ Back to topDose: $5,250 a year of employer-paid education tax-free under a written §127 plan, any courses (not just job-related); unlimited for job-related education as a working condition fringe; fully deductible on Schedule C for a self-employed person maintaining or improving skills in the current business.
Employees can no longer deduct education they pay for themselves (the miscellaneous itemized deduction is gone, permanently). The route is the employer: a §127 plan costs the employer nothing but paperwork, and job-related reimbursements above $5,250 are excludable as working condition fringes. Education that qualifies you for a new trade (law school for a paralegal; the CPA exam review for a bookkeeper) is never deductible, employer-paid or not, except under §127.
↑ Back to topDose: the education credit goes to whoever claims the student. If the parents claim the student, the parents take the credit even if the student paid. If the parents could claim the student but don’t, the student can take the nonrefundable part of the credit on the student’s own return, but not the refundable $1,000.
Two decisions. Parents over the phase-out ($180,000 joint) can’t use the credit; letting the student claim it (and forgoing the $500 other-dependent credit) can be worth $1,500 to the family if the student has enough tax to absorb it. And the student who files first and claims himself blocks the parents’ return; the student’s return gets amended, not the parents’. A full-time student under 24 who doesn’t provide more than half his own support is the parents’ dependent regardless of what he checked.
↑ Back to topThe amount actually paid for qualified expenses during the calendar year, from the school’s billing statement, not the 1098-T box 1 if it is wrong. Keep the statement. The 1098-T is reported to the IRS, so if your figure is higher, we attach an explanation.
Not entirely. You can still claim the credit; the cost is that the earnings on $4,000 of the 529 withdrawal become taxable (no penalty). Next year, pay $4,000 of tuition from checking and the rest from the plan, and both work in full.
Possibly. If the scholarship’s terms allow it, treat part of it as paying room and board. That part becomes taxable to her, usually at zero after her standard deduction, and the tuition it no longer covers supports the credit on your return.
If you don’t claim him as a dependent, he can take the nonrefundable part of the credit against his own tax, up to $1,500. You give up the $500 credit for other dependents. It is worth it if he owes at least that much tax; a student with a summer job often does.
For the Tax Shop desk · the phase-outs, coordination rules and FAFSA interactions
Bring the school’s billing statement for the calendar year (not just the 1098-T), the 1099-Q, the scholarship letter, and the loan interest statement. The decisions that need making before December are which account pays the spring bill and when, and whether the parents or the student will claim the credit. Those two conversations are worth $2,500 a year, four times.
Call 303-734-1040 or stop by the office in Lone Tree. We’ve been reading the footnotes for Douglas County and the Denver area since 1969.
Figures reflect the 2026 tax year as currently published and are rounded for readability. Items marked (verify) are to be confirmed against IRS or Colorado DOR sources before the figures freeze in December. Last updated October 15, 2026.
