Are you the parent of a high school junior? If so, 2014 is your “base year” for financial aid purposes. What does that mean? It means that your initial financial aid applications—FAFSA and/or CSS PROFILE—will be based on your income and assets for 2014. Now is a good time to make plans or adjustments that will help you in aid calculations.
As I’ve said before, income is a bigger factor than assets in the formulas. In both aid formulas, the three biggest allowances against income are your family size, how many dependents you have in college, and how much you pay in taxes.
At this point, it’s likely that how much you pay in taxes is the area where you can do the most. And paying more federal taxes is better in the formulas than paying less. (The formula counts actual federal taxes paid, but uses a formula for state tax allowances.) Of course, you don’t want to cut off your nose to spite your face: you want to find opportunities to shift your tax burden into this year with a corresponding decrease in taxes in a subsequent year. One way to do that is to contribute to a Roth IRA rather than your 401(k), or if your employer’s 401(k) plan has a Roth option, use it for some or all of your contributions. You’ll pay taxes on that money now, which will reduce your available income in the formulas, but you’ll have tax-free withdrawals in the future.
Self-employed people have a variety of options for managing their income in the base year. I’ll talk about those in a future post.