This is one of those things that seems fairly straightforward but has a definite peeling the onion feel to it. What is Income for purpose of the FAFSA?
First, you’ll need 2 documents to complete the income section:
- Your 2014 tax return
- Your 2015 W-2s
The FAFSA asks several questions about income:
“What was your parents’ adjusted gross income for 2015? This amount is found on IRS Form 1040 line 37.” You haven’t filed taxes for 2015 yet, so pull out your 2014 return and adjust– did you get a raise? Did you change your 401k contributions? If you’re self-employed, was your income substantially different from last year? You can also use the FAFSA’s Income Estimator button.
“How much did Parent 1 [Parent 2] earn from working? This amount is your Parent 1’s [Parent 2’s] portion of IRS Form 1040-lines 7+12+18.” If both your parents work, it’s far easier to use their W-2 than to try to sort out which portion of that line belongs to whom. Here’s the tricky part: If you are filling the FAFSA out now, you probably don’t have your W-2 and you are tempted to use your year-end pay stub. If you do that and you contributed to your employer’s retirement plan, you need to adjust gross earnings by subtracting retirement plan contributions. Why? Because you’ll add retirement plan contributions back in the “Untaxed Income” section of the FAFSA.
Next, the FAFSA asks you to “Enter the amount of your parents’ income tax for 2015” which is line 56-line 46 of the 1040. This is not your withholding; this is the actual federal income tax due. (It’s also not state or FICA taxes.) Again, if you’re filing the FAFSA before filing your taxes, you’ll need to estimate. Use last year’s tax return, not this year’s pay stub: again, it’s actual tax liability, not withholding.
Next you’ll report “Additional Financial Information.” In this section, it’s important to differentiate the Parent Information and Student Information. For example, both Parent and Student sections ask about “Taxable earnings from Work-Study” and “College grant and scholarship aid.” If the student received either of these, they get reported in the Student section.
Last (among the Income portion) you’ll report “Untaxed Income.” The most common items in this section are:
- Retirement plan contributions (401ks, IRAs, SEPs, etc.)
- Child support received (not alimony; that would already have been included in AGI since it’s taxable to the recipient)
- Untaxed portions of IRA distributions. If you withdrew from a Roth IRA, it gets reported here.
The Student Income section has an additional checkbox under “Untaxed Income”: “Money received or paid on your behalf.” This is where distributions from a 529 plan that is owned by someone other than the parents are reported. So, if grandma and grandpa are paying for college with a 529 plan, report those distributions here. And this is why, if you’re a need-based aid candidate, you want to wait to take those distributions later in your college years.