Till now, we have acquired a good amount of knowledge on the fundamentals of the financial aid process. In the upcoming sections, we are going to analyse certain strategies that will help us increase our aid eligibility. Your federal income tax returns are going to play a pivotal role in deciding your aid eligibility. So, let us start by discussing certain strategies by which you can legally mould your federal income tax returns, and successfully increase your aid eligibility.
- Adjusting the Bonus:
If you are one of the few Americans who is about to receive a bonus at the workplace, then you should better discuss with your boss about the possibility of moving your bonus into a non-base income year. This bonus will still be counted as your asset, but you will get a benefit of not getting it counted in both your assets and income.
For example, if you are receiving a bonus in the year when your child is in his senior high school, you should try to ask for a hold on the bonus until January 1 of the next year. In this way, you can avoid the bonus being seen in the previous year’s financial aid form, and you can easily can avail a good amount of financial aid, though the bonus will be counted in the next year’s financial aid form. To totally avoid the inclusion of the bonus in the financial aid forms, you should ask your boss to shift the bonus to a non-base income year.
- Adjusting the Retroactive Bonus:
If you have had an unusually great year at work, for example, if you have got a retroactive bonus or you have worked a lot of overtime hours, then you may have to write individually to each college (all the colleges where your child has applied for admission), explaining to them that this was once in a lifetime event, and this may not happen again in future.
Along with that, you can send them your income tax returns of previous years, to prove that your average salary is much lower.
- Unreimbursed Employee Expenses:
If you are not eligible for SNT or automatic Zero-EFC, and you have a good amount of unrepaid employee expenses, then you can discuss with your employer about the viability of becoming an independent contractor. The advantage in doing so is that, you can file your income under Section C of the tax form (showing profit from business), which will enable you to deduct the amount of money used for the business-related expenses. Further, you should and consult your accountant about any disadvantage in doing this. Check, if the disadvantage outweighs the advantage.
Point to be noted- Setting up a dummy business for the purpose of showing extra business expenses may not work on your part, because the IRS auditors and the FAO are really experienced at spotting the fake business. Only setting up a legal and legitimate business can help you in deducting legitimate business expenses, and may also reduce your AGI.
- Saving bonds:
If you have been investing in the US savings bond, then you must try to avoid encashing it in a base income year. Because, the interest you earn from it will also be taken into account as your asset, and this will increase your EFC. What you can do is, you can encash it after the last base income year, i.e. the senior year at college of your child. You will have to pay an income tax return on the interest you have earned, but you can avoid getting the interest included in the assets.
- Transferring the Assets to the Sibling’s Account:
Transferring your assets in your child’s sibling’s name can prove to be a disadvantage, as it will still increase your EFC, and will affect your financial aid eligibility. If you have already done this, then you should consider filing a separate return for each child, because if you file the child’s income return along with your own (Parent) income tax return, then your AGI will increase, and so will your EFC.
Important Tip: Many accountants have developed a habit of encouraging their client into refund the money. They do it because:
- They know that their clients won’t consider putting some effort in setting up an automatic payroll saving plan at work
- The temporary pleasure of walking out of the Consultant’s office with some extra bucks in hand will compensate for the large fee that he has charged.
This must be avoided because refunding does not affect the tax one has to pay, which means, ultimately same amount of tax has to be paid no matter what.
- Adjusting the Alimony:
The alimony is also counted as an asset, and it effects the financial aid eligibility. In some cases, if the alimony payment has decreased for a particular year, then it you must explain the situation to the college, and request them to consider the situation while deciding the financial aid package.
Similarly, if any retroactive alimony has been received for a particular year, then the college must be informed about it (show it as a rare event). To prove that this was once in a lifetime event, you can send the previous year’s tax returns to the college, and ask them to decide the aid accordingly.
- Stocks and Bonds:
If you are a stockholder, or have a bond, or any other financial instrument, then you should not consider selling them in a base income year. The gains you will earn from selling the stock, or bond, or financial instrument will be counted as your income, and it will affect your income tax return and financial aid. On the other hand, if you have suffered a loss by selling the stocks, then that loss will not be taken into account and only the final selling price will be considered. Try to avoid large capital gains during base income years. If there is an urgent need of cash, then one can consider borrowing against the stock in the form of a loan. This will help you to convince the FAO about your net assets being less, as you have debt against that asset.
- Adjusting the Capital Gains:
In certain situations, the stock holders may find an urgency to use their capital gains. Let us discuss some similar situation and find a solution to them:
- The capital gains can be adjusted by showing the losses that one has been carrying in the form of stock. If you own any stock, that has never given you any gain, then this might be the right time for you to sell those stocks, accept the loss, and use the loss to your advantage. This will help you cancel the gain.
- The losses and gains from the stock can be used for several years. The IRS allows you to deduct the capital losses from the capital gains, and if the losses exceed the gains, then you can further deduct up to $3,000 from your incomes. Any extra loss can be adjusted in the future years.
- If you have incurred some large gains in a base income year, which has to be shown on the financial aid form, then you should consider writing about it to the college, and notify them about this as a very rare event (mention that this may not happen again in the future).
- If there is an unusual fall in the price of the stocks through which you can avail gains, then you should consult your stockbroker about ways of locking the stock price at a particular amount, without having to sell the stocks.
- Sale of Primary Residence:
The Taxpayer Relief Act of 1997 made some amendments to the rules involved in the sale of primary residence. According to this change, if somebody has sold his own primary residence, where he has lived for at least two of the last five years prior to the sale, then he is permitted to exclude up to $2,50,000 in capital gains every two years on the sale of his home (up to $5,00,000 for a married couple filing jointly). If the gains exceed the given mark, then that will be taxed.
Any amount of capital gain above $2, 50,000 mark, has to be mentioned in the aid form as your asset. If you are planning to buy another property very soon, but you have got to fill the aid form urgently before it, then you must write to the FAOs, telling them that you will not have those assets once you purchase another property.
- LINE 15- Individual Retirement Account (IRA) Distributions: The line 15 on the 1040 form covers any withdrawal made from the IRAs, before the retirement (age 59 ½ years). These withdrawals will be penalized by subjecting a part or whole of the withdrawn amount to income tax, and in many cases a 10% penalty is also charged (The taxpayer relief act 1997 made changes in the rule, which included removal of the 10% penalty on the withdrawn amount, only if the money is used to fund educational expenses).
Further this early withdrawal during the base income year will affect your aid eligibility, as the withdrawn amount will be counted as your income. The taxed part of the withdrawn amount will raise all-important line 37 on your tax return; whereas the tax-free part will also affect your EFC, since the aid formulas assess untaxed income as well.
- LINE 16- Pensions and annuities: If you are a pensioner, and receive pensions at regular intervals, then avoiding the pensions in the base income years and transferring them to IRAs for transaction in future will have two benefits. Firstly, the aid eligibility will increase, and secondly the money in the IRA will earn you interest.
- Line 17 and Line 18: This two line of the 1040 form requires you to list the income from rents, royalties, estates, partnerships, trusts and farm income. Like the schedule C income, one can deduct expenses, repairs and depreciations from the income through the above sources, especially during base income years. This will decrease your AGI.
- Line 20 A and B: Paying taxes on the social security benefit solely depends on your circumstances.
- Line 21- other incomes- Any other source of income that has not been listed above, like the money received for jury duty, or from proctoring SAT exams, gambling winnings etc. comes under this section. In case of gambling, the IRS allows you to deduct losses against the winnings, but that may not convince the FAO.