FAFSA Income Surprises

Friends are having a FAFSA nightmare: their daughter’s EFC came back as 60% of their income. They suspect the reason for this is that he consolidated his retirement accounts, rolling several over into a single larger account, and that some or all of that rollover is showing as an IRA distribution. Fortunately they have the records to show that this was not a distribution but a trustee-to-trustee rollover; unfortunately, they have to reach out to each school individually to correct their EFC.

If this is a FAFSA income year and you are doing an IRA or 401k rollover, you’ll want to make sure it gets treated as a rollover, not a distribution. The way you’ll know for sure is that you’ll receive a form 5498 for a rollover and a 1099-R for a distribution. If you have any questions about this, call your IRA custodian now rather than waiting until you receive a 1099-R and asking for a correction.

Here are some other income sources that sometimes surprise people:

  • State tax refund. These are reported as income in the year they’re received, since state income taxes paid are deductible on your federal return. A $1,000 state tax refund will increase your EFC by as much as $470. If you are overwithholding state income tax, change your withholding for the remainder of the year so that you’re slightly under what you expect to owe. Most states have an online tax calculator that you can google.
  • Roth IRA distribution. You don’t report this on your tax return, but you do report it on the FAFSA.
  • Pre-tax retirement plan contributions.
  • Alimony or child support received. (If you paid either alimony or child support, you get to deduct it from your income.)
  • Tax-exempt interest income.
  • For divorced and remarried parents, the stepparent’s income.


2 thoughts on “FAFSA Income Surprises

  1. This happened to me this year! I have 4 kids in undergrad who all previously got a Pell grant. This year, nothing, not even a Dept of Ed. loan. Calling one of the schools alerted me that my rollover was reported to them as an untaxed distribution. Calling fafsa is no help. Once you use the IRS data retrieval tool, it cannot be undone. The 5498 mentioned above is only good if the rollover involved an IRA. For a 401k rollover you need the 1099-R with a code ‘G’ on it to indicate it was a rollover. I’m emailing all the schools finan aid offices to request a revised award notice and I’ll followup by sending them the 1099-R.

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