Category Archives: Divorce

Simplified Formula: Not So Simple

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. 

FAFSA Basics: Student Income

Student income seems pretty straightforward on the surface. Students get an income protection allowance of $6,840 plus the same tax allowances as parents. Income in excess of the allowance is assessed at 50%. Given the prevailing minimum wage, it would appear that student income is not much of a factor. However, there are a few big items that get added into student income: Continue reading FAFSA Basics: Student Income

EFC Formula Guide 2020-2021 & FAFSA Basics

Last week, the Department of Education released the FAFSA Formula Guide for the coming FAFSA. Before I give you that link, I want to share some basics about the FAFSA. I’ll also break out each section of it in depth in the coming weeks– hopefully before the new FAFSA arrives on Oct. 1. Continue reading EFC Formula Guide 2020-2021 & FAFSA Basics

Better EFC Strategies

I get tons of questions about strategies for reducing EFC, especially those related to the Asset Protection Allowance. And there are plenty, but sheltering assets is typically the lowest bang-for-the-buck strategy out there: Every $1,000 you shelter will only reduce your EFC by $54. And that assumes that the school will meet your full need. Here are some better options: Continue reading Better EFC Strategies

FAFSA for Divorced Parents

This is a big topic so for today I’m going to focus on general rules. Keep in mind the FAFSA rules are different from the CSS Profile rules; below is FAFSA only.

The custodial parent for the FAFSA can be different than the custodial parent in the divorce decree and/or different from who claims the student as a dependent on their tax return. The FAFSA defines the custodial parent as “The parent that you lived with most Continue reading FAFSA for Divorced Parents

FAFSA Custodial Parent

For divorced parents, figuring out who is the custodial parent for FAFSA filing purposes can be a little confusing. Actually, the rules are pretty simple: the custodial parent is the one with whom the student spends the most time. That’s not necessarily the parent named custodial parent in the divorce decree, or the one claiming the student on their tax return. Continue reading FAFSA Custodial Parent

Aid Formulas

If you’ve been reading this blog for a while, this is a bit of a refresher post.

There are three aid formulas: Federal methodology (FM), based on the FAFSA; Institutional Methodology (IM), based on the CSS PROFILE; and Consensus Methodology (CM), which uses both aid forms. Each is a different way of calculating a family’s Continue reading Aid Formulas

Why file the FAFSA

As many as 1/3 of college students don’t complete the FAFSA. There are a variety of reasons why not, ranging from fears about its complexity to the assumption that it’s not worth the time because the family is not eligible for aid and hundreds if not thousands of other reasons. The end result is that a lot of money is left on the table and many families Continue reading Why file the FAFSA