The FAFSA offers a “Simplified Formula” that eliminates asset reporting for low-income families– those with household incomes below $50,000. There are some eligibility limitations, primarily designed to limit the Simplified Formula to those who truly have low incomes, not those who are able to manage or artificially reduce their incomes. In the past, in order to qualify for the Simplified Formula, filers must have filed or been eligible to file a 1040A or 1040EZ, or have received a means-tested federal benefit such as Medicaid, SNAP or SSI. However, the Trump tax reform of 2018 eliminated the different versions of the 1040, so the eligibility criteria changed.
To understand the change, you need to understand the tax forms. 1040A and 1040EZ do not allow for itemized deductions or for self-employment or business income, including from rental properties. You also cannot use these forms if you’re the beneficiary of a trust. Both forms are also limited to incomes below $100,000.
The new tax law that went into effect in 2018 eliminated the different versions of the 1040 and replaced some forms with different schedules, so the Department of Education needed to come up with new criteria for the Simplified Formula for the current FAFSA, which is the first to use the 2018 tax return.
This year, the Simplified Formula is available to those who did not file a Schedule 1 or if so, only used it to report “capital gains, unemployment compensation, Alaska Permanent Fund dividends, educator expenses, IRA deductions, or student loan interest deductions.” What else is on Schedule 1? Besides self-employment, business, rental property and trust income (and the above items), Schedule 1 is used to report:
- Taxable refunds, credits, or offsets of state and local income taxes
- Alimony received or paid
- Farm income or (loss)
- “Certain business expenses of reservists, performing artists, and fee-basis government officials”
- Health savings account deduction
- Moving expenses for members of the Armed Forces
- Penalty on early withdrawal of savings
Two big groups are thus eliminated from the pool of Simplified Formula filers unless they receive a means-tested benefit:
- Divorced parents (who were already ineligible if alimony was paid or received)
- Participants in high deductible health plans
Some others: people who use CDs for savings and cash them out early, or who cash out retirement accounts before age 59-1/2 to pay for college or other needs.
While it certainly makes sense to keep business owners or investment property owners from using the Simplified Formula, others who should be eligible will need to be aware of the new limitations. And before you pull out the pitchforks, remember that the Simplified Formula does not change the FAFSA calculation at all; it merely removes questions about assets. A family who doesn’t qualify for the Simplified Formula based on the tax form criteria will just need to answer the questions about assets. The first asset question in the online FAFSA is whether you have assets in excess of the asset protection allowance for your family, and if you answer “No,” you won’t see any further questions on the topic unless required by your state.