Home Fafsa FAFSA Tutorial: Step-by-Step Student and Parent Financial Information

Student and Parent Financial Information

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Now it’s time for the financial information. You (and your FAFSA® parent) will be providing information based on your 2018 tax filing (2018 W-2 Forms) for the 2020-2021 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.

This page will go over the financial information you 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. 

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 after the end of the tax year
  • Cannot list a different home address on the FAFSA and federal income 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.

Reporting Tax Information

Did You File Your 2018 Taxes Already?

You will have three options on the FAFSA:

  1. Already completed
  2. Will file
  3. 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. The FAFSA will ask you one more question:

What type of tax return did your parents file in 2018?

  • IRS 1040:  You will have the opportunity to use the IRS DRT to import the information directly from the IRS
  • Foreign tax return, IRS 1040NR, or IRS 1040NR-EZ: You will be ineligible to use the IRS DRT
  • A tax return with Puerto Rico, a U.S. territory or Freely Associated State: You will be ineligible to use the IRS DRT

NOTE: If you are determined eligible to use the IRS DRT, then 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 (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. 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 six-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 2018 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 your 2018 federal income tax returns, FAFSA on the Web provides an “Income Estimator” that can help you calculate an estimated AGI for the 2017 tax year. If you have not yet filed your 2018 federal income tax returns, it is okay to use estimated 2018 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 2018 federal income tax returns.

Earned Income From Work

These questions ask about your earnings from sources such as wages, salaries and tips in 2018. 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 Form 1040.

earned-income-from-work

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 2018. 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
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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 combat pay.

    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.

  • The taxable portion of scholarships, fellowships, tuition reimbursements/waivers and AmeriCorps benefits (education awards, living allowances and interest payments for student loan interest which accrued during a parent’s time of service) that were included in adjusted gross income (AGI).

    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.

  • Education tax credits, (i.e., the American Opportunity Tax Credit and Lifetime Learning Tax Credit)
  • Untaxed portions of IRA distributions and pensions.
  • Tax exempt interest income
  • Child support paid (do not report for any children counted in household size)

    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.

  • Earning from work under a Cooperative Education Program offered by a college
  • Taxable earnings from need-based student employment, (i.e., federal work-study, and teaching/research assistantships)

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 non-education 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.

Untaxed income you do not need to include:

  • 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 (EITC), the Additional Child Tax Credit (ACTC), 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, 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.

Support includes not just cash, 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 cash received from his or her grandparents as untaxed income on the FAFSA, the student’s parents are not asked this question.

Reporting Assets on the FAFSA

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 investment property (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 is 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.

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