In this study, we explored elementary preservice teachers’ (PSTs’) competence to make diagnostic inferences about students’ levels of understanding of fractions and their approaches to developing appropriate tiered assessment items. Although recent studies have investigated beginning teachers’ diagnostic competency, teachers’ ability to design and evaluate diagnostic assessment items has remained largely underexplored. Fifty-seven PSTs, who enrolled in a mathematics methods course at a midwestern university in the U.S., participated in developing and attempting to differentiate diagnostic assessment items considering individual students’ varied levels of understanding. An inductive content analysis approach was used in identifying general patterns of PSTs’ approaches and strategies in designing and revising tiered assessment items. Our findings revealed the following: (a) the PSTs were well versed in students’ cognitive difficulties; (b) when modifying the core questions to be more or less difficult, the PSTs predominantly used strategies related to procedural fluency of the questions; and (c) some strategies PSTs used to modify questions did not necessarily yield the intended level of difficulty. Further, we discussed the challenges and opportunities teacher education programs face in teaching PSTs how to effectively design tiered assessment items.