Tax season brings a unique set of questions for families with college students. Do you file a return for your student? Can you still claim them as a dependent? What is that 1098-T form, and why does it matter? Whether you are a parent helping your child through their first filing or a student trying to figure it out on your own, this article breaks down exactly how college affects your taxes -- and where the real savings are.
Does Your College Student Need to File a Tax Return?
The short answer: it depends on how much they earned. For the 2025 tax year, a single dependent under 65 must file a federal return if they earned more than $14,600 in gross income. That number includes wages from a campus job, a summer internship, or freelance work.
But earned income is not the only thing that counts. Unearned income -- like interest from a savings account or investment gains -- has a much lower threshold. A dependent must file if their unearned income tops $1,300, or if their total earned and unearned income together exceeds certain combined limits.
Here is a quick rule of thumb:
- Your student worked a part-time job and earned less than $14,600 with no other income? They probably do not need to file, but they may want to anyway to get a refund of withheld taxes.
- Your student had a mix of wages and investment income? Run the numbers using the IRS Interactive Tax Assistant to be sure.
- Your student is self-employed and earned more than $400? They must file, period. Self-employment tax applies even if total income is below the standard deduction.
Even when filing is not required, it is often worth it. Many students have federal and state taxes withheld from their paychecks. The only way to get that money back is to file a return.
Dependent or Independent? Why It Matters
One of the biggest tax questions for college families is whether the student counts as a dependent on the parent's return. This is not a choice -- the IRS has specific rules.
A full-time student under age 24 generally qualifies as a dependent if they did not provide more than half of their own financial support and lived with the parent for more than half the year (time at college counts as a temporary absence). According to the IRS dependent guidelines, the student also cannot file a joint return with a spouse, and they must be a U.S. citizen, resident alien, or national.
Why This Matters for Education Credits
The parent who claims the student as a dependent is the one who claims the education tax credits. The student cannot claim those credits on their own return if someone else can claim them as a dependent. This is true even if the parent chooses not to claim the student. The "can claim" language is key here -- if the parent is eligible to claim the student, the student is locked out of the credits regardless.
For most families, having the parent claim the student and the education credits produces a bigger tax benefit. Parents typically have higher income and owe more tax, so the credits reduce a larger bill.
Understanding the 1098-T Form
If your student attended a college or university, the school will send a Form 1098-T by January 31 each year. This form reports tuition and related expenses the school received during the tax year.
Here is what you will find on it:
- Box 1: Payments received for qualified tuition and related expenses. This is the amount the school actually received, not what was billed.
- Box 5: Scholarships or grants. This includes all scholarships, grants, and third-party payments applied to the student's account.
- Box 4: Adjustments to prior year. If the school adjusted a prior year's qualified expenses, it shows up here.
The difference between Box 1 and Box 5 matters. If Box 1 is larger, you likely have qualified expenses that could support an education credit. If Box 5 is larger, part of the scholarship may be taxable income.
When Scholarships Become Taxable
Scholarships used for tuition and required fees are tax-free. But scholarship money used for room and board, travel, or other non-qualified expenses is taxable income. According to the College Board's Trends in Student Aid report, undergraduate students received an average of $16,170 in grant aid in 2024-25. With scholarships at those levels, it is common for Box 5 to exceed Box 1 on the 1098-T, making a portion of the award taxable.
This catches many families off guard. If your student received a large scholarship that covered tuition plus room and board, the room and board portion may need to be reported as income on the student's tax return.
Education Tax Credits: The American Opportunity and Lifetime Learning Credits
This is where the real money is. Two federal tax credits can significantly cut your tax bill.
The American Opportunity Tax Credit (AOTC)
The AOTC is worth up to $2,500 per eligible student per year. It covers 100% of the first $2,000 in qualified education expenses and 25% of the next $2,000. Even better, 40% of the credit (up to $1,000) is refundable, meaning you can get it even if you owe no federal tax.
Key details:
- Available for the first four years of undergraduate education only
- Student must be enrolled at least half-time
- Modified adjusted gross income (MAGI) must be below $90,000 for single filers or $180,000 for married filing jointly (partial credit available above those thresholds up to $80,000/$160,000 respectively for phase-out)
- Qualified expenses include tuition, fees, and course materials (but not room and board)
According to IRS data, roughly 9 million tax returns claimed the AOTC in recent years, totaling about $18 billion in credits. That is a significant benefit many families leave on the table.
The Lifetime Learning Credit (LLC)
The Lifetime Learning Credit is worth up to $2,000 per tax return (not per student). It covers 20% of the first $10,000 in qualified education expenses.
This credit is more flexible than the AOTC:
- No limit on the number of years you can claim it
- Student does not need to be pursuing a degree
- Available for undergraduate, graduate, and professional coursework
- MAGI phase-out begins at $80,000 for single filers and $160,000 for joint filers
You cannot claim both the AOTC and LLC for the same student in the same year. For most undergraduates, the AOTC is the better deal because it is worth more and partly refundable. The LLC becomes useful after the four-year AOTC window runs out or for graduate students.
The Student Loan Interest Deduction
If your student (or you, as a parent) is repaying student loans, there is another tax break worth knowing. The student loan interest deduction lets you deduct up to $2,500 in interest paid on qualified student loans. This is an "above the line" deduction, meaning you do not have to itemize to claim it.
Income limits apply here too. The deduction phases out for single filers with MAGI between $80,000 and $95,000, and for joint filers between $165,000 and $195,000 for the 2025 tax year.
One important note: if the student is claimed as a dependent, they cannot take this deduction on their own return. The parent can deduct the interest only if they are legally obligated on the loan. If the loan is in the student's name alone, neither the parent (who is not obligated) nor the student (who is a dependent) can claim the deduction. This is a common gap that costs families real money.
Roadblocks to Watch
Tax filing for college families is full of potential missteps. Here are the ones that trip people up most often.
Filing the Student as Independent When They Are Not
Some students check the "independent" box on their tax return because they feel independent. But the IRS does not care about feelings -- it cares about the support test, the age test, and the residency test. Filing incorrectly can trigger an audit and force the family to pay back education credits already claimed.
Missing the 1098-T or Ignoring Box 5
Schools sometimes send the 1098-T to the student's campus address. If you never see the form, you may miss out on credits or fail to report taxable scholarship income. Both are problems. Check with the bursar's office or log in to the student portal -- most schools post the form online.
Not Coordinating Between Parent and Student Returns
The parent claims the student as a dependent and takes the education credit. The student then files their own return and also claims the credit. The IRS catches this mismatch every time. Before filing, sit down together and decide who claims what. Only one return gets the education credit, and it should be the parent's if they are claiming the dependent.
Overlooking State Tax Benefits
Many states offer their own education credits or deductions. For example, some states let you deduct contributions to a 529 plan on your state return. Others have state-level versions of the AOTC. Check your state tax authority's website for details specific to where you live.
Forgetting About the Kiddie Tax
If your student has significant investment income, the "kiddie tax" rules may apply. For dependents under 24 who are full-time students, unearned income above $2,500 (for 2025) may be taxed at the parent's marginal rate instead of the student's lower rate. This can create a surprise tax bill.
Frequently Asked Questions
Can my student file their own return if I claim them as a dependent?
Yes. The student can and sometimes must file their own return even while being claimed as a dependent on the parent's return. The student just needs to check the box indicating someone else can claim them as a dependent. They will report their own income and can get a refund of withheld taxes. They simply cannot claim the personal exemption or education credits.
What if my student earned money in a different state?
Your student may need to file a tax return in the state where they earned the income, as well as in their home state. This is common for students who attend college in one state but have their permanent address in another. Most states offer a credit to avoid double taxation, but you need to file in both to claim it.
Should we use a tax professional or can we do this ourselves?
If your situation is straightforward -- W-2 income, one 1098-T, and a dependent claim -- free tax software like IRS Free File can handle it. If your student has self-employment income, significant investments, or scholarships that may be taxable, a tax professional can be worth the cost. The Volunteer Income Tax Assistance (VITA) program also offers free preparation for qualifying taxpayers.
Does 529 plan money count as taxable income?
No, as long as the withdrawals are used for qualified education expenses like tuition, room and board, and required fees. If you withdraw more than your qualified expenses, the earnings portion of the excess is taxable and may incur a 10% penalty. Keep good records of how 529 funds are spent.
The Bottom Line
Tax filing for college families is more complicated than a standard return, but the payoff is real. The AOTC alone can put up to $2,500 back in your pocket each year for four years -- that is $10,000 over the course of a degree. Add the student loan interest deduction, state-level benefits, and proper handling of scholarships, and you could save thousands more.
The key is coordination. Parents and students need to talk about who claims what before either return is filed. Make sure you have the 1098-T in hand. Run the numbers on both credits to see which gives you the bigger benefit. And if your situation is complicated, get professional help -- the cost of a tax preparer is almost always less than the cost of a missed credit.
Planning how to pay for college is about more than just tuition bills. It includes understanding where the tax savings fit into the bigger picture. If you want to see how all the pieces come together for a specific school -- from financial aid to out-of-pocket costs -- try building a plan at CollegeLens. It puts the real numbers in front of you so you can make decisions with confidence.
-- Sravani at CollegeLens