By the time my oldest stepson started going to college, we had almost two years of tuition socked away in a 529 account. The tax-advantaged education savings plan is a favorite of parents and grandparents alike, and many families start pumping money into them before a child’s first birthday.

Saving for an advanced education is a great idea, especially with the cost of college mirroring or even outpacing the outrageous cost of healthcare in the U.S. over the past two decades. But did you know that 529 plan could cost you money if you’re not careful?

Neither did I, until it was time to do the taxes after my son’s freshman year.

The American Opportunity Tax Credit

When you file taxes and claim education expenses, you’re typically going for the federal American Opportunity Tax Credit. Here’s what the credit entails, from the Internal Revenue Service:

“The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.

“The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student. But, if the credit pays your tax down to zero, you can have 40 percent of the remaining amount of the credit (up to $1,000) refunded to you.”

So if you pay $4,000 in qualified education expenses, you get a $2,500 reduction in taxes for up to four years. I don’t know about you, but $10,000 is a lot of money to me. I don’t want to miss out on that credit!

You use a calculator and graph paper when you do your taxes, right? Oh …

Here’s the catch with 529 plans

Here’s where most people miss the fine print: You can’t double-dip your tax advantages. Because the 529 is already tax advantaged, you can’t claim expenses paid with it for the federal tax credit.

Let’s say you diligently saved for years and your child’s 529 has a healthy balance of $40,000 — more than enough to cover a couple years of in-state tuition at most universities. Maybe your student even has some scholarships that take care of a few thousand bucks and that money will stretch even farther.

For the first year, you pay everything out of the 529 plan. Tuition, books, room and board, eligible supplies. All told the 529 covered $15,000 and you’re pleased as punch with your forward thinking.

Come tax time, you can’t claim any of that on your federal taxes. You don’t qualify for that $2,500 AOTC break because you paid all of those expenses out of a tax-advantaged account. Therefore, no additional tax advantages.

Ouch.

The quintessential representation of college living.

How you can take full advantage of all the college tax breaks

The trick to having the best of both worlds is to understand what can and cannot be covered by the AOTC and the 529 and then optimize.

For instance, a computer may be covered by the AOTC if it is required by the institution for attendance. But it can always be paid for with a 529 if the primary use is educational. Most significantly, housing costs aren’t eligible for the federal tax breaks, but they are acceptable expenses for 529s.

If you plan to pay $4,000 in tuition and books out of pocket each year, then use the 529 to pay for additional expenses and housing costs, you can claim the full AOTC on your federal taxes and pay for the remainder with the tax-favored 529 dollars.

Even if you haven’t saved much in a 529 plan before your child heads off to school, you still could get additional tax benefits. Utah, where I live, offers a 5% tax break for contributing to the state’s 529 plan.

If your state tax gives a similar break, you may want to use a 529 as a passthrough account for things like rent. For instance, if you’re paying for off-campus housing, deposit your rent into the 529 mid-month to get the tax benefit, then withdraw it and pay your rent. Or run every additional dollar over the $4,000 that qualifies for the AOTC through a 529 before you buy other eligible education items with the money.

Not every state offers a tax break or necessarily has the same rules, so double-check the laws in your state before running with this idea.

Other ways to cut college costs

If you’ve got a kid going to college or a few years away from college, aside from all the usual things like scholarships to consider, think about these:

  • If the school is nearby, and it’s somewhere you might like to work and offers tuition discounts, consider taking a job there to save on your child’s education. Alternatively, if the student is planning to work full-time while going to school, can they find a full-time job at the school and get their own tuition break? Administrative assistant, groundskeeper, maintenance worker, and other such jobs might fit the bill.
  • Have your child take as many concurrent enrollment or college-credit-eligible classes as they can in high school. They’ll go in with a good chunk of the first semester’s classes knocked out, which means they can either graduate early or take 12 credit hours a semester instead of 15 to graduate in four years with less pressure.
  • Books don’t need to be nearly as costly as they were just a decade ago. Online textbooks, rental services, and other methods can substantially reduce what used to be a several hundred dollar a semester expense.
  • Consider taking online courses that will be transfer-eligible for the institution of your choice. There are so many respected universities that offer online classes that you might be able to take for less than in-person ones. Just check with the institution you want to graduate from to ensure they will accept the transfer credits.
  • Some institutions allow you to pay tuition with a credit card. Many charge a 3% fee (basically passing the credit company’s transaction fee off to you), but not all of them. Can you use those tuition payments to meet the minimum spend on a credit card travel rewards program? Doing so could totally cover and drastically reduce the cost of things like a flight home for the holidays if your student is going to a school in a different state from where you live. (Read more about how I saved over $4,000 in flights with very basic travel rewards techniques that anyone can understand.)

This post is part of the #FinHealthMatters contest, in which I’m hoping to win a ticket to this year’s FinCon in Orlando, Fla.