Higher-income families that attend the high school financial aid night often walk away with nothing but frustration and feeling like it was a waste of time. If you’re one of those families, then our College Planning with Tax Strategies blog series is for you.
The reality is that high-income earners and many business owners will probably not be eligible for financial aid when their child is ready for college. Their income is simply too high to qualify for need-based aid.
Here is the good news: once you know that you are not going to receive need-based aid, you can shift your focus to other strategies to cut your college costs. The first thing to focus on is finding colleges that offer aid based on the merit of your talented student.
Another place where you can realize savings is by taking a closer look at tax strategies that are often overlooked to cut the cost of college.
📝 Re-Evaluating Your Tax Filing Strategy
Many families fall back on the standard tax credits and deductions — mortgage interest, standard deduction, etc. — but never stop to think if the standard methods are the right ones for them.
If a family earns more than approximately $200,000, they are likely to encounter limitations on certain tax benefits. And for very high earners, they may still be subject to the Alternative Minimum Tax (AMT), in which many standard deductions are not allowed. Whether or not they have children or students in college may have less impact on their final tax bill than they think.
So the question becomes, if you are not going to get a full tax benefit for claiming your student as a dependent, should you claim them?
Maybe not. It’s critical to work closely with your tax professional to determine what is best for your family’s situation, and it’s important to consider utilizing your child’s tax capacity — the lower tax bracket and ability to access education credits.
Removing the student as a dependent from the parents’ taxes may provide the student with access to education credits the parents were not able to qualify for because of their higher income. This, in turn, can cut the family’s total tax bill.
Here are the key education credits and their 2025 Modified Adjusted Gross Income (MAGI) phase-outs for Married Filing Jointly (MFJ) to be aware of:
Note on Tuition & Fees Deduction: The availability of this deduction has been inconsistent in recent years. For the 2025 tax year, it may be unavailable, making the AOTC and LLC even more critical to maximize. The income limits for the credits listed above are currently the most reliable figures for 2025.
👨🎓 How Can a Student Qualify for Their Own Dependency Deduction?
A full-time student under 24 years old can claim dependency on their own if they provide over 50% of their own financial support.
Most students don’t earn enough from working to meet that 50% mark. However, financial support can include not only paid salary, but also investment income and appreciated assets gifted from the parent or grandparent to the student.
The student who sells those appreciated assets will also avoid capital gains tax on the first $1,350 of gain (2025 figure). Capital gains above that amount can make the student subject to the “kiddie tax” at their parents’ tax rate once unearned income exceeds $2,700 (2025 figure). However, the education credits may offset any additional tax due and still be an overall tax savings for the family. So, the student avoids capital gains tax on the first part of the gain and uses that money to pay for their expenses, thus crossing over that 50% line. The student now meets the “support test” requirement and can claim a portion of the education tax credits. Pretty cool!
The tax code is complicated. We are attempting to bring up some items in an easy-to-understand manner to make you question whether the old standby way of filing your taxes is the correct one. Always consult with your tax professional to determine what is best for your unique situation.
What’s Next?
Tune in to our blog next week to learn how business owners can save thousands in taxes every year by shifting income and even make tuition tax-deductible.
