While it’s true that there is an income protection allowance on the FAFSA, it’s extremely low– roughly the federal poverty line for a family of your size. The bigger issue is what is included in income and what is subtracted from it to arrive at “Available Income.” Why is that a bigger issue? Because you might be able to influence it.
What goes into income? These items:
- Each parent’s earned income from work
- The parents’ taxable income
- The parents’ untaxed income. This includes pre-tax retirement savings, child support, Roth IRA distributions, nontaxable interest, disability benefits, etc. (Not included: distributions from education savings accounts such as 529s and Coverdell ESAs.)
- Students include “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” in their income.
Then, these “allowances” are granted against income:
- Your actual federal income tax paid
- An allowance for your state income taxes and Social Security taxes
- An “employment expense allowance” if all parents in the household work
- The income protection allowance itself.
The biggest variable in all of this– really the only variable besides your income– is your actual federal taxes paid. You can influence this by timing your deductions (minimize them in the base year) and your tax deferrals. For purposes of FAFSA planning, the base year is a great time to contribute to a Roth 401k or IRA, for example, instead of a traditional. Or if you don’t fully fund retirement annually, increase your contributions the year before your base year and decrease them by a corresponding amount in the base year to increase your taxes paid that year.
Reminder: The base year is the tax year for your first FAFSA. With the FAFSA changes that were implemented last year, the base year is now the year beginning Jan. 1 of sophomore year. I have two sophomores, so this is our base year.