FAFSA Tutorial Step #6: Student and Parent Financial Information

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Now it’s time for the financial information. You (or your FAFSA parent) will be providing information based on your 2017 tax filing (2017 W-2 Forms) for the 2019-2020 FAFSA. The following will be written from the perspective of you, the student applicant. If there are differences for a FAFSA parent, it will be identified throughout.

Remember:

  • Dependent students will need to provide financial information of their FAFSA parent(s). There are two different sections to report this information.
  • Independent students, if married, will need to provide their spouse’s financial information. This will be reported in the student’s financial section.
  • Single, independent students will need to only provide their own information

The following section will go over the financial information which will be asked for. The treatment of student income and assets is similar to the treatment of parent income and assets, with an exception for cash support received by the student.

  • Cash support received by a dependent student’s parent(s) is not reported as income on the FAFSA.
  • Cash support received by a dependent student from the student’s custodial parent(s) is not reported on the FAFSA.
  • Cash support received by a dependent student from other sources including the non-custodial parent, grandparents, aunts, uncles, and other third parties is reported as untaxed income to the student on the student’s FAFSA.
  • Cash support received by an independent student from all sources other than the student’s spouse, if any, is reported as untaxed income to the student on the student’s FAFSA.

IRS Data Retrieval Tool

When completing the FAFSA, the IRS Data Retrieval Tool (IRS DRT) allows students and their families to transfer tax report income information from an earlier tax year. The IRS DRT may be used to complete the initial FAFSA or to update information on the FAFSA. The IRS DRT will be available to use on the 2019–20 FAFSA on the web and mobile application when the FAFSA is released on October 1, 2018.

Taxpayer requirements for using the IRS DRT:

  • Must have a valid social security number
  • Must have an FSA ID and password
  • Cannot file as married filing separately or Head of Household
  • Cannot have a marital status of "Unmarried and both legal parents living together"
  • Cannot have a change in marital status before the end of the tax year
  • Cannot list a different home address on the FAFSA and federal tax return
  • Cannot file a foreign income tax return instead of or in addition to the U.S. federal income tax return. Puerto Rican tax returns are not eligible to use the DRT.

Did you file your 2017 taxes already?

You will have three options on the FAFSA:

  • Already completed
  • Will file
  • Not going to file

If the answer is “Already completed” then you may have an opportunity to use the IRS Data Retrieval Tool (IRS DRT) to import your financial information directly from the IRS.

At this point, if you are still eligible to use the IRS DRT, the FAFSA will ask one more question.

  • Did you file a Puerto Rican or foreign tax return for 2017?
    • If you answer “yes” then you (or your parents) will be ineligible to use the IRS DRT.
    • If you answer “no” then you (or your parents) will be given the option to Link to the IRS – this will import tax information with the IRS DRT.

If you are determined to be eligible to use the IRS DRT, than many of your income information questions will be pre-filled—but the information will be masked. That is actually done for security reasons and is a protection for you (and your FAFSA parent).

If the answer is “Will file” then you will be asked what type of tax return you plan to follow (Single, Head of Household, Married-Filed Joint Return, Married-Filed Separate Return, Qualifying Widow(er), Don’t Know). Then you will be asked to input your estimated income (and there is an Income Estimator available to help).

If the answer is “Not going to file” then you will need to report earnings (wages, salaries, tips, etc.). Please note, if you (or your FAFSA parent) choose this option and your income is above the IRS tax-filing threshold, your FAFSA will be selected for verification. And this may affect your ability to receive need-based aid.

(There is an exception to the timely filing requirements for active duty members of the U.S. Armed Forces serving in a combat zone. Also, taxpayers who file IRS Form 4868 to get an automatic 6-month extension must provide the college with a copy of their W-2 forms and must either use the IRS Data Retrieval Tool or provide a tax transcript after their federal income tax returns are filed.)

Adjusted Gross Income (AGI)

AGI is the total of all income that will be listed on the 2017 federal income tax return before it is reduced by deductions, exemptions, and tax credits. It includes earned income (i.e., wages, salaries, bonuses, and tips), as well unearned income, i.e., interest and dividend income; capital gains; alimony received; business and rental property income; unemployment benefits; and the taxable portion of pensions, IRA distributions; and Social Security benefit payments. The AGI is reduced by alimony paid, the penalty on early withdrawal of savings and certain other above-the-line exclusions from income (i.e., the student loan interest deduction, tuition and fees deduction, educator expenses and moving expenses).

If you have not yet completed their 2017 federal income tax returns, FAFSA on the Web provides an “Income Estimator” that can help them calculate an estimate of their 2017 AGI. If you have not yet filed your 2017 federal income tax returns, it is okay to use estimated 2017 income information on the FAFSA. Estimates can be based on W-2 and 1099 statements, the last pay stub of the prior-prior year from each employer, and the prior-prior year’s federal income tax returns. You will be required to update the FAFSA later using the IRS Data Retrieval Tool, after filing your actual 2017 federal income tax returns.

Earned Income from Work

These questions ask about your earnings from sources such as wages, salaries and tips in 2017. These questions must be answered whether or not you file a tax return. This information may appear on your W-2 and 1099 forms, or on IRS Forms 1040, 1040A or 1040EZ.

The FAFSA on the Web and the mobile app will help you determine where you can find this information if you click on the “?” by the question. The paper FAFSA will explain what lines to report from your tax return.

Combat pay should not be included in income earned from work.

Income earned from work is used to calculate an allowance for FICA taxes (Social Security and Medicare tax), an allowance for state and other taxes and the employment expense allowance. These and other allowances are subtracted from income when calculating the expected family contribution (EFC).

Income earned from work is also used instead of adjusted gross income (AGI) for people who are not required to file a federal income tax return.

Federal Income Tax

This question asks for the amount of your federal income tax for 2017. This question is based on the total income tax before the addition of other taxes, such as self-employment tax and household employment taxes.

We recommend you click the “?” when using the FAFSA on the Web or the mobile app to help you determine where you can find your income tax. The paper FAFSA will explain what lines to report from your tax return.

Report the federal income tax figure based on the specific lines of the federal income tax return. Do not use a different line of the federal income tax return or add other tax liabilities to this figure.

Other common errors include:

  • Reporting the total tax line from the federal income tax return instead of the total income tax line
  • Reporting the amount withheld by employers (or even one paycheck’s worth of withholdings instead of the end-of-year total when using the last pay stub of the year to estimate)
  • Reporting the amount of estimated tax paid
  • Reporting the total payments from the federal income tax return, the amount overpaid or the amount owed
  • Reporting adjusted gross income (AGI) instead of total income tax

Tax Exemptions

Report the total number of exemptions claimed on your federal income tax return regardless of whether or not they are counted in household size.

Household size on the FAFSA and the number of exemptions on the federal income tax return are based on different definitions and are not necessarily equal. For example, exemptions are based on the prior tax year while household size is based on the award year. The IRS and FAFSA also use different definitions of support.

Although the number of exemptions may differ from household size, college financial aid administrators may question a significant discrepancy between the two numbers. If this occurs, be prepared to explain this apparent discrepancy.

Additional Financial Information

Certain types of income and expenses are excluded from income by the federal financial aid formula. For example, the taxable portion of need-based student aid is excluded from income for federal student aid purposes. These exclusions are reported in the Additional Financial Information section of the FAFSA so that they can be subtracted from adjusted gross income when calculating the student’s eligibility for need-based financial aid.

The exclusions from income include the following figures from your income tax return:

  • Taxable earnings from need-based student employment, (i.e., Federal Work-Study, teaching/research assistantships, and cooperative education programs)
  • The taxable portion of scholarships, fellowships, tuition reimbursements/waivers and AmeriCorps benefits (education awards, living allowances and interest payments) that were included in adjusted gross income (AGI)
  • Education tax credits, (i.e., the American Opportunity Tax Credit and Lifetime Learning Tax Credit)
  • Child support paid (do not report for any children counted in household size)
  • The taxable portion of combat pay

Families sometimes incorrectly report the full amount of a scholarship on the FAFSA. This question is intended to compensate for the portion of a scholarship or similar aid that was included in adjusted gross income. Do not report the tax-free portion of a scholarship or similar aid on the FAFSA.

Combat pay for enlisted persons and warrant officers is entirely tax-free. Only commissioned officers may have some taxable combat pay, generally equal to the amount that exceeds the highest pay for an enlisted person. Total combat pay is listed on the servicemember’s leave and earnings statement. The difference is the taxable portion of combat pay.

Some families may get confused by the child support questions. There are two questions, one for child support paid and one for child support received. Do not incorrectly report child support received in the child support paid question or vice versa. Report only child support paid or received because of a legal requirement (i.e., a child support agreement, divorce decree or legal separation). Child support received outside of a legal agreement should be reported as untaxed income.

Untaxed Income

Certain types of untaxed income are counted by the federal need-analysis formula despite not being included in adjusted gross income.

To determine what you need to report here, remember to click the “?” on the FAFSA on the Web or the mobile app. The paper FAFSA will explain what you need to report.

These types of untaxed income include:

  • Child support received for all children. Do not include foster care or adoption payments.
  • Housing, food, and other living allowances paid to members of the military, clergy, and other (including cash payments and cash value of benefits). Do not include the value of on-base military housing or the value of a basic military allowance for housing.
  • Payments to tax-deferred pension and retirement savings plans (paid directly or withheld from earnings), including, but not limited to, amounts reported on the W-2 Form in Boxes 12a through 12d, codes D, E, F, G, H, and S. Don't include amounts reported in code DD (employer contributions toward employee health benefits)
  • Veterans noneducation benefits such as Disability, Death Pension, or Dependency & Indemnity Compensation (DIC) and/or VA Educational Work-Study allowances
  • For you the student only (not included in the FAFSA parent’s section) money received, or paid on your behalf (e.g., bills), not reported elsewhere on this form. This includes money that you received from a parent or other person whose financial information is not reported on this form and that is not part of a legal child support agreement
  • Other untaxed income not reported, such as workers' compensation, disability benefits, etc.

The latter catch-all category does not include several types of untaxed income and benefits, including:

  • Types of untaxed income and benefits that are excluded by the statute, such as any form of student financial aid (including employer-paid tuition assistance), child support paid, Supplemental Security Income (SSI), earned income tax credit, the additional child tax credit, welfare benefits (such as Temporary Assistance for Needy Families [TANF], Supplemental Nutrition Assistance Programs [SNAP] and Special Supplemental Nutrition Program for Women, Infants, and Children [WIC]), income earned from a cooperative education program, AmeriCorps living allowances, untaxed Social Security benefits, the foreign income exclusion, the credit for federal tax on special fuels, veterans education benefits, per capita payments to Native Americans (only amounts up to $2,000), dependent care assistance (up to $5,000), and combat pay.
  • Types of untaxed income and benefits that are not specifically mentioned in the statute (i.e., the foster care benefits, adoption assistance payments, heating/fuel assistance (LIHEAP), rent subsidies for low-income housing, and contributions to or payments from flexible spending arrangements (cafeteria plans)).

The intention of this section is to include untaxed income of a discretionary nature in total income. Non-elective pension plan and retirement plan contributions are not counted in untaxed income. For example, contributions to certain state public employee retirement systems (i.e., the IPERS (Iowa), KPERS (Kansas) and OPERS (Ohio) retirement systems), are involuntary and should not be reported as untaxed income on the FAFSA. On the other hand, contributions to a 401(k), 403(b) or IRA, on the other hand, are voluntary and must be reported as untaxed income on the FAFSA. Likewise, contributions by federal employees to the Thrift Savings Plan (TSP) are voluntary and, therefore, represent untaxed income. Note that employer contributions to retirement plans, health benefits and pension plans are not counted in untaxed income.

Note that the parents’ untaxed income section does not include a question for “money received, or paid on your behalf” while the student’s untaxed income section does. This question concerns cash support (i.e., money, gifts, and loans, plus expenses paid by others on the student’s behalf). Support includes not just cash, gifts, and loans, but also any expense the student would otherwise have had to pay (i.e., housing, medical/dental insurance, car payments and insurance, college costs, food, clothing, etc.) If the student lives with his or her parents, there will be a presumption that the parents are providing more than half support if the parents are paying for the housing costs. So, while a student would have to report a gift from his or her grandparents as untaxed income on the FAFSA, the student’s parents do not have to report gifts they receive.

Asset Information

The FAFSA on the Web will specifically ask you if your current assets exceed a certain amount. If the answer to this question is “No” then you have completed the FAFSA Asset section. However, if your answer is “Yes”, you will need to provide information regarding the net worth of certain assets.

The net worth of an asset is the current market value of the asset minus any debts secured by the asset. If the net worth of an asset is negative, it is reported as having zero value on the FAFSA.

The asset value is reported as of the date the FAFSA is filed. In practice, this should be the asset value from the most recent bank or brokerage account statement received prior to the date the FAFSA was filed. If the FAFSA is selected for verification, the college financial aid administrator may ask for a copy of the bank or brokerage account statement to document the asset’s value as of the date the FAFSA was filed.

You will be asked to report the following:

  • As of today, what is your total current balance of cash, savings, and checking accounts?
  • As of today, what is the net worth of your investments, including real estate (not your family home)?
  • As of today, what is the net worth of your current businesses and/or investment farms? Don't include a family farm or family business with 100 or fewer full-time or full-time equivalent employees.

Reportable assets do not include the family’s principal place of residence (the family home), a family farm (if it is the family’s principal place of residence and the student and/or parents materially participate in the farming operation), any small business owned and controlled by the family, qualified retirement plans, life insurance plans, and personal possessions (e.g., clothing, furniture, personal automobiles, computer equipment and software, and television and stereo equipment).

Note that small businesses defined as having less than 100 full-time or full-time equivalent employees. To be controlled by the family, the family must own more than 50 percent of the business.

If an asset is owned by more than one person, you should report only your share of the asset. Unless a legal agreement specifies a different division, ownership of the asset should be divided equally.

Dislocated Worker and Displaced Homemakers

You will only see this question on the web and mobile application if the FAFSA logic believes you may qualify. On the paper FAFSA, the question is asked in both the parent and student section. You are presented with the options of “Yes," “No," or “Don’t know”.

The FAFSA asks whether you, your spouse (if you are married) or your FAFSA parent(s) (if you are a [dependent student]) is a dislocated worker. This question is important for those who have been laid off or who have been struggling due to a loss of income or underemployment. Answering “yes” to these questions may enable the applicant to qualify for the simplified needs test or automatic zero EFC (Expected Family Contribution).

This question is prone to error, as many applicants misinterpret it as including anybody who has lost a job. It is important to read the definition of a dislocated worker carefully. After reading the definition you are not sure, there is an option on the FAFSA to answer “Don’t know”. This gives you the opportunity to ask your financial aid office to help you determine if you qualify.

Definition of a Dislocated Worker

A dislocated worker is defined in the Workforce Investment Act of 1998 (29 USC 2801) as a person who falls into one of the following categories:

  • Someone who is eligible for or receiving unemployment benefits (or who has exhausted eligibility for unemployment benefits or was ineligible because of insufficient earnings or because the type of services performed weren’t covered by the state’s unemployment compensation law) because he/she was laid off or lost a job (or has received a layoff or termination notice) and is unlikely to return to a previous occupation.
  • Someone who is terminated or laid off from employment (or received a termination or layoff notice) because of a permanent closure of, or substantial layoff at, a plant, facility or enterprise.
  • Someone who is the spouse of an active duty member of the U.S. Armed Forces and either is a displaced homemaker or has lost his or her employment because of relocating due to a permanent change of duty station.
  • Someone who is employed at a facility where the employer has announced that the facility will close within 180 days.
  • Someone who is self-employed and is unemployed because of a natural disaster or because of the general economic conditions in his or her community.
  • Someone who is a displaced homemaker.

A person who voluntarily quits his/her job or who is terminated for cause is not considered to be a dislocated worker.

Definition of a Displaced Homemaker

A displaced homemaker is someone who satisfies all of the following criteria:

  1. They provided unpaid servicers to family members in the home, such as a stay-at-home parent.
  2. They were supported by income from another family member but are no longer supported by that income.
  3. They are unemployed or underemployed and are having difficulty obtaining or upgrading employment.

Documenting Status as a Dislocated Worker

The applicant may be asked to provide documentation to support claims of dislocated worker status. Such documentation may include, but not be limited to, the recent receipt of unemployment benefits, copies of employer termination and layoff notices, copies of previous years’ federal income tax returns (to demonstrate a reduction in income), copies of death certificates, or copies of divorce decrees and separation agreements.

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