Federal Aid

Adjusting the Expenses to Achieve More Federal Aid

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Adjusting the EXPENSES to Increase the Federal AID:

Your expenses speak a volume about your worth, and the colleges consider them while deciding on the aid package for you. Your expenses can be divided into the following two categories:

  1. Expenses According to the IRS
  2. Expenses According to the Financial Aid Formula

Let us discuss both the forms of expenses in detail.

  1. Expenses according to the IRS:
    • Line 23- Educator Expenses: The educators (Teacher, Aide, Principal, Instructor, etc.) who work for more than 900 hours annually, and have some amount of qualifying out-of-pocket expenses can avail a maximum deduction of $250 per taxpayer. Previously, these expenses were listed as a part of miscellaneous itemized deductions on schedule A of the 1040. If you qualify for this kind of deductions, then you must use them to adjust your income, which will help you to reduce your AGI and EFC.
    • Line 26- Moving Expenses: If your job requires you shift from one location to other, then you can use the expenses involved in shifting to adjust your income. This decreases your tax liability, and increases your financial aid eligibility.Important Point: Certain changes were made to the tax law regarding moving expenses, such as pre-move house hunting trips are excluded from the deductions. So you must read the IRS instructions or consult a competent advisor regarding the same.
    • Line 27- Self-Employment tax deductions: One part of the self-employment taxes can be deducted by the self-employed individuals, and the federal and institutional formulas consider this acceptable.
    • Line 29- Self Employed Health Insurance Deduction: If you are self-employed, or carry at least 2% of the share of an S corporation, and if your total medical expenses add up to a certain percentage of your total income, then you are allowed to make deductions from your income regarding this kind of expenses. If you qualify under the above conditions, then you can deduct 100% of your qualifying health insurance premiums on line 29 of the 1040 form. (High Medical Expenses are no longer considered deductible in the federal aid formula due to some changes.)One should consider making these deductions instead of showing the expenses in the schedule A, because, it will help you show less income and reduce your AGI, and it is a sure deduction.
    • Line 30 and 31A- Penalty on early withdrawal of savings, and Alimony paid: The Lines 30 and 31A allow you to report any penalty incurred due to early withdrawal from savings before maturity, and/or if you paid out any alimony. These losses can also be shown, and the total income can be adjusted accordingly
    • Line 33- Student Loan Interest Deduction: One can adjust their income under both the federal and the institutional formulas, if they have taken loan for their own, or their spouse’s or any other dependent’s post-secondary education. Deductions can be claimed based on the interest one has to pay for the loan.
    • Line 34- Tuition and Fees Deductions (Expired in 2013; may be extended): If your income is low, and you meet certain other criteria, then you can claim up to $4,000 deduction in qualified higher education expenses for 2015, even if you itemize deductions on your income tax returns. Only if one has already claimed the Hope, or American, or Opportunity, or Lifetime Learning Credits, then he cannot claim this deduction.
    1. Expenses according to the Financial Aid Formula:

      • Paying High Income Tax:
        Paying Higher Federal Taxes during the base income years can help you increase your financial aid eligibility. The Financial aid formula counts the federal income taxes as an expense. In some situations, if you pay higher tax than regular, then you can adjust your AGI, and lower your EFC which will automatically increase your aid eligibility.

      • Donations to the Charities:
        When a person donates money to any charitable trust, then his/her income tax automatically decreases. But doing so in a base income year can affect your EFC, because the financial aid formula does not consider the donations, and only look at the amount of tax paid during the year. If your income tax for the year comes out to be lower than other years, then it can negatively affect your EFC. So one should avoid making large charities during the base income year.
      • Deductions of Tax Credits:
        The line 56 of the 1040 form seeks information about the amount of tax credits that you have deducted from the federal income tax. This decides your federal income tax liability. The tax credits you claim will decrease your aid eligibility, but in most cases you should avail it – as the value of money lost through the aid will be less as compared to the credits.Important point: According to the 1997 tax laws, some of the tax credits, like the child tax credits and the education credit can be availed without worrying about the effect on the aid eligibility.
        Any amount of education credit claimed by you can reduce your income tax returns, and the expenses can be excluded from the income. But, the financial aid formula does not work in the same way as the IRS, and any education credits claimed will reduce the aid eligibility.
      • Alternative Minimum Tax (AMT):
        If you have claimed certain credits and because of it your income tax has decreased below a certain level, then you may have to pay an additional tax on the credits claimed, which is known as the Alternative Minimum Tax (AMT). Until recently, a penalty was imposed on the families who were subjected to the AMT, as this tax was not counted in the aid formulas. This tax basically affects individuals in the top tax bracket.Recently, the AMT was included in the financial aid formulas, and this tax now proves to be helpful in reducing the EFC of the taxpayers, in both the federal and institutional methodologies.
      • FICA or Medicare taxes:
        The questions on the FAFSA and the PROFILE– “Father’s income earned from work?”, and “Mother’s income earned from work?”, not only seek information about the family’s income, but it also checks how much amount has been paid into FICA or Medicare taxes. The financial aid formulas give you deductions for the Medicare and the social security taxes (otherwise known as FICA)Important Point: The pre-tax wage contributions into tax-deferred retirement accounts can help you increase your EFC. Though the amount of aid may not be significant, but when you add up a number of these small aid, then it can help you significantly.
      • Assessing the Primary Residence:
        The deductions made to the taxable and untaxable income are calculated by a need analysis computer. The computer adds your taxable and untaxable income and multiplies it to certain percentage, which varies from one state to another. The formula for each state is slightly different.If somebody has a primary residence in one state and works in some other state where the taxes are higher, then he/she may be paying more tax than what the formula indicates. The computer does not recognize any exceptions, and if you are in such situation, then you may have to write to each college individually, and inform them about the problem.
      • Employment Allowance:
        Single parents who work, and the two-parent two-income family, qualify for an allowance known as Employment Allowance. Under the federal formula, the married couples can avail deductions of 35% of the lower wage earner’s income earned from work, up to maximum deductions of $4,000. Similarly, any single parent can avail deductions of 35% of the income earned from work, up to a maximum deduction of $4,000.The need analysis computer calculates these deductions based on the four questions on the FAFSA form, which are – father’s income earned from work, mother’s income earned from work, and marital status of both of them.
      • Income Protection Allowance:
        The Income Protection Allowance tends to check the amount of money needed by one’s family to fulfil basic amenities like house, food, and clothe during one year. The allowance is solely based on the number of members currently living in the household, and the number of dependent children who are going to college. Making an actual budget of all your housing expenses can help you in convincing the FAO regarding them.
      • Annual Education Savings Allowance:
        If you have more than one child, then you can avail another deduction known as Annual Education Savings Allowance. The change made to the institutional methodologies in the year 2000-2001 allows you to deduct (1.52% of the total income * number of younger siblings excluding the student applicant). The deductions can be made up to a maximum amount of $2,770 (keeps on changing).
    2. Other Optional Expenses: There are some other expenses, like the medical, dental, and elementary/ secondary school tuition fees for the student’s sibling’s that have to be listed on both the PROFILE form and the school’s aid forms.Let us analyse some other kind of expenses:
      • Medical Deductions: The federal formula allows you to avail medical deductions, only if, at least 10% of your total AGI is used as medical and/or dental expenses. But, the institutional methodology is a bit liberal in this case. One can avail the medical deductions at any amount of expense.

        There are hundreds of medical expenses which qualify under these deductions, like a visit to the doctors or dentists, prescription eyeglasses, therapists, after-tax health insurance premiums that were deducted from your pay check or that you paid personally, etc.

        Information about medical expenses for every family member should be included. Write each and every expense involved in any medical conditions, may it be the cab fare to the doctor’s office, or any other small expense.

        Above the 3.5% mark, each dollar spent for medical purpose can increase your aid eligibility by 47 cents. So, for any year, if your medical expenses are too low, then you should consider transferring them to the next base income year. Also, If you feel that there may be some large medical expenses in the future, then you should write about it to the college.

      • Elementary and Secondary School Tuition Fees Deduction: The FAO has got a major part to play in this context. If the candidate has any younger sibling/s who is/are attending a private elementary or secondary school, then the parents can report the expenses on the PROFILE form, and some college aid forms. The FAO will decide if there should be any deductions made to the income for the younger sibling’s tuition.

        There are some exceptions to this. The younger sibling must not be in the private high school, because the very next year, he/she will not be there anymore. The Sibling must be either in the pre-high school or less. If there are any exceptional situation that you are facing, then explain the situation to the FAO.

        IMPORTANT POINT: One should keep a record of every information that the colleges require. The information includes the requirement of the FAFSA and PROFILE forms in a different college. There are college, which ask only for FAFSA, and some colleges only asks for PROFILE, and then there are some colleges which require both FAFSA and PROFILE. As we know, the FAFSA form does not count unrepaid medical expenses, and the PROFILE form counts it; so if your child applies to any college which requires only FAFSA, then you may have to write to them separately, explaining to them about your unrepaid medical expenses.

        In addition, there are some state grant aid programs such as Pennsylvania’s PHEAA program, which can help you in increasing your aid, if you send them a proof of high medical expenses.

        One might wonder, as to how does the college process so much financial information, and how does the college count the EFC and aid package. It is very simple mathematics. They add all your taxable and untaxable income, and subtract from it all your expenses and allowed adjustments. Whatever is left, is the available income. If your available income is zero, then the EFC is zero. If your available income is greater, then the contribution will also increase, but only up till 47% of the available income under federal formula, and 46% of the available income under the institutional formula.

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