The FAFSA asks about income numerous ways: it collects your tax return data through the IRS Data Retrieval Tool and then poses a number of additional questions about income. So let’s look at those.
First, the IRS DRT pulls your 2019 tax data including adjusted gross income and actual taxes paid. However, that leaves some items out and the FAFSA wants to know about those because they may make you better or worse off when brought into the picture. Some will increase your EFC where others will decrease it.
Big picture: the FAFSA takes your total income– taxable and untaxed, subtracts actual federal taxes paid and allowances for FICA and state taxes, subtracts an income protection allowance based on your family size, and calls that “Available Income.” But some parts of your income are income and others are not. Here’s a quick list:
- W-2 Income: YES, it’s income!
- Pre-tax contributions to IRAs, 401(k)s and other retirement plans: YES, it’s income! Your IRA contribution is reported on your tax return; your employer plan contributions are listed in Box 12a-d, codes D, E, F, G, H and S. You add these back in the Parent Financial section after completing the IRS DRT.
- Roth or other non-deductible retirement contributions: NO, these do not get added back because they’re already included in your taxable income.
- HSA contributions: Yes, these are added back to income in the same way that pre-tax retirement contributions are.
- Education tax credits (AOTC and LLC): These are reported on the FAFSA so that federal taxes paid can be adjusted so you are not penalized on the FAFSA for having claimed an education tax credit.
- Work Study earnings: NO, these are not income! On your FAFSA you will be asked for work-study earnings so that these can be subtracted from your income.
- Roth IRA or other nontaxable distributions from retirement accounts: YES, these are income and must be reported! This is one of many reasons not to use a Roth IRA as your college savings vehicle.
- Qualified distributions from the parent’s 529: NO, not income! This is one of many reasons to use a 529 as your college savings vehicle.
- Child support received: YES, it’s income! Child support paid is subtracted from the payor’s income. Often this equalizes ex-spouse’s incomes for FAFSA purposes but it’s always worth doing the FAFSA 4caster to figure out if it’s more beneficial for one or the other parent to claim the student for FAFSA purposes.
- Housing or living allowances for military or clergy: YES, it’s income! Unless the military allowance is for on-base living.
- Untaxed disability benefits including veterans noneducational benefits: YES, it’s income!
- Dividends and interest earned in a non-retirement investment or savings account, including tax-free interest: YES, it’s income!
- Untaxed Social Security benefits: NO, it’s not income!
- Distributions from a non-parent-owned 529: YES, it’s income! In fact, 100% of the distribution– not just the growth/earnings portion– is Student income.
- IRA or 401k rollovers: NO, it’s not income as long as it goes into another tax-deferred account. If you’re in a FAFSA year, make sure you do trustee-to-trustee rollovers so they don’t show up on your tax return.
- Roth conversions: YES, it’s income!
- Nonqualified withdrawals from a 529: YES, it’s income! Plus you pay a penalty. If you’re distributing excess to a child who’s no longer a student, make sure it’s distributed to them, not the parent, so it doesn’t need to be reported.
- Taxable transactions in an UTMA or UGMA account: YES, it’s income to the student! However, if the purpose of the transaction is to transfer the UTMA/UGMA account to a custodian 529, as long as the gain realized through sale of the assets in the account keeps the student below the student income protection allowance ($6,970 on this year’s FAFSA) it’s still worth doing.
And with all of this, remember that income is based on the tax year used in the FAFSA. This year’s FAFSA uses 2019 income, so any of the above that happened in 2019 get reported on this year’s FAFSA. Any such income received in 2020 will be reported on next year’s FAFSA.