What You Need to Know Financial Aid Income Deductions
Summary of Income Offset Rules
- Employment expense allowance
- Child support paid, alimony paid
- Need-based work-study
- Taxable grants / scholarships
- Education tax credits
- Social Security and State Tax Allowance
- Income protection allowance (“IPA”)
- Americorps awards
- Federal Income Tax paid including AMT
- Combat Pay (taxable portion)
- Non-reimbursed medical expenses in excess of a threshold can vary by college
EFC Calculators Are Only Accurate With Accurate Input
Accurate EFC calculations require understanding the rules, especially when it comes to understanding the planning opportunities with non-assessable income/asset strategy choices.
You don’t want to miss any when trying to lower your EFC so you can qualify for more Financial Aid.
Warning, income is the big driver of the EFC formula so make sure you do income planning prior to any asset positioning strategies unless college planning is secondary to implementation.
“Untaxed income and benefits” are added back to in to your Adjusted Gross Income (“AGI”). Please make sure you review those if you have not already done so.
Employment Expense Allowance [Source: Education Department Notice 5.29.2012]
Families with two working parents and one-parent families have extra expenses that must be considered such as meals away from home, transportation, clothing, etc.
This allowance considers these expenses.
For 2014-2015 school years, the allowance is the lesser of $3,900 or 35% of earned income from the smaller income from the two working parents (FAFSA questions 88 and 89). The rule is the same for a single working parent.
Earned income in this instance uses the same definition as earned income for the social security tax deduction (W-2 Medicare Wages.
The allowance is zero for married couples where only one parent has reported earned income.
The employment expense allowance is never less than zero.
Child Support / Alimony Paid
This is a deduction for both the parents and the student when these payments are made.
Need-Based Work Study
If included in adjusted gross income, need-based or Federal work-study compensation can be deducted from financial aid income.
Taxable Grants / Scholarships
Misunderstood area and possibly can result in an unexpected tax bill. Taxable grant and scholarship aid in excess of books, tuition, fees, and required supplies that is included in the student’s AGI is a deduction.
Education Tax Credits
The American Opportunity Tax Credit and the Lifetime Learning Tax Credit are not included in financial aid income.
Social Security and State Tax Allowance
State tax allowance is computed based upon state of residency and automatic, you have no control over the amount. Social security is a deduction based upon the amount of earned income, including payments in kind, shown on Form W-2 “Medicare Wages” and Schedule SE.
Income Protection Allowance 2013-2014 [Source: Education Department Notice 5.29.2012]
Here is an example of an income allowance (Income Protection Allowance – IPA) for a dependent student’s family. This allowance is the amount of living expenses associated with the maintenance of an individual or family that may be offset against the family’s income. It varies by family size. The IPA for the dependent student is $6,310. The IPAs for parents of dependent students for award year 2015-2016 are:
Parents of Dependent Students
Number in college
For each additional family member add $4,210.
For each additional college student subtract $2,990.
[Information Updated 3.27.2015]
Benefits if included in adjusted gross income for benefits received under the National and Community Service Act of 1993 can be deducted from financial aid income.
Federal Income Tax Paid Including AMT
The actual amount “paid” not “withheld” is a deduction. This does not include social security tax on tips, and any penalties paid (10%) on early withdrawals from retirement accounts. In addition, advance earned
income credits and household employment taxes are not included.
Taxable portion of combat is not reported as financial aid income. Combat pay for enlisted personnel and warrant officers is tax free, but commissioned officers can have the amount above the highest grade pay of the enlisted personnel as the amount taxable.
Non-Reimbursed Medical Expenses in Excess of 3 1/2% of Income, Institutional Method Only
Please note: the 3 1/2% is the suggested percentage by the College Board but CSS Profile (“Institutional Method”) schools are free to set their own percentage and some do.
These are a deduction from Financial Aid Income.Here is an example of one of our strategies.
Strategy Move: Look at possible upcoming medical expenses especially “arbitrary choice” ones that are tax deductible; delay or accelerate them into years where your children are in college.
One of the advantages of College coaching is that someone is watching the “timing” of strategies as well as the development of workable strategies that can save you money.
There are other strategies that pertain to wage reduction, self employment,business entity, unearned income and tax strategies integrated with college financial planning.
There are variations how EFC rules apply with the EFC Formula Methodologies.
These require careful evaluation of individual circumstances and family planning objectives.
Our personal coaching program can help you reach your goals.