| AwardYear: 1994-1995 Edition: PostSecondary Part: 3 - - Filling Out the Free Application for Federal Student Aid SectionNumber: SectionTitle: Section G -- "1993 Income Earnings, and Benefits" PageNumbers: 74-80 PURPOSE: THE EFC CALCULATION COMPARES THE FAMILY'S INCOME FROM THIS SECTION TO THE FAMILY'S HOUSEHOLD SIZE AND OTHER EXPENSES, TO DETERMINE IF THE FAMILY HAS ANY DISCRETIONARY INCOME. IF THE FAMILY DOES HAVE DISCRETIONARY INCOME, ONLY A PORTION OF THAT INCOME IS EXPECTED TO BE CONTRIBUTED TOWARDS THE STUDENT'S EDUCATIONAL COSTS. NOTE THAT THE "INCOME EARNED FROM WORK" ITEMS ARE USED TO DETERMINE IF THE STUDENT IS ENTITLED TO AN EMPLOYMENT EXPENSE OFFSET. Section G collects information on the BASE YEAR INCOME of the parents (if the student is dependent) and of the student and spouse, as well as income tax paid, tax filing status, and the number of exemptions claimed. The base year for applicants in 1994-95 is the 1993 tax year. Estimated base year income for the tax year may be used if the family has not yet filed its 1993 tax return. However, if it turns out that the estimated information is incorrect, the student must make corrections on the SAR when the tax return is filed. Puerto Rican Tax Return Puerto Rican Form 481 or the short form (Forma Corta), is considered to be an IRS Form 1040A or 1040EZ for the purpose of completing the FAFSA. Puerto Rican Form 482 or the long form (Forma Larga) is considered to be an IRS Form 1040 for the purpose of completing the FAFSA. Foreign Income Income earned in a foreign country is treated in the same way as income earned in the United States, if taxes were paid to the central government of that country. The student should report the value of the foreign income in U.S. dollars (using the exchange rate at the time of application), on the "adjusted gross income " line item and the "income earned from work" line item. The student should also include the value of taxes paid to the foreign government on the "U.S. income tax paid" line item. (If the income earned in the foreign country was not taxed by that country, it should be reported as untaxed income.) FORM 2555. In many cases, if the student or parent files a return with the Internal Revenue Service for a year in which foreign income was earned, a portion of the foreign income can be excluded, on a Form 2555, for tax purposes. The figure reported on Line 43 of the Form 2555 should be reported as "untaxed income" on the FAFSA. The final total for the Form 2555 must not be reported as untaxed income, because it contains other exclusions. Income earned from work The line items for income earned from work for the father and mother are used to calculate the employment expense offset. They are only used in the income assessment if no Adjusted Gross Income was reported on the application. Untaxed income and benefits Under "untaxed income and benefits," separate line items are provided for Social Security benefits, AFDC payments, and child support because these are the most common forms of untaxed income and benefits. Note that if Social Security benefits are paid to the parents on behalf of the student (because the student was under 18 years old at the time), those benefits are reported as the parent's income, not the student's income. If the Social Security check was made payable to the student, it would be reported as the student's income. Students must be sure that Line 67 or 78, the "other untaxed income and benefits," does not include any of the Social Security or AFDC benefits already reported in previous line items. The line items for "other untaxed income and benefits" are used to report any benefits received by the student and parents that are not reported elsewhere on the form. Any cash support received from a family member or third party should also be reported as untaxed income. In some cases, the value of housing or payments on behalf of the student must be reported. INCOME EXCLUSIONS ON IRS FORM. Two examples are the untaxed portion of capital gains, and the interest and dividend exclusion. Both must be reported on the application for financial aid purposes, because they represent additional financial resources available to the family, even though they are not taxed as a matter of public policy. EARNED INCOME CREDIT. The "Payments" section on the IRS forms includes an earned income credit, which is a potential source of income that must be reported on the application. IRA/KEOGH, PENSIONS AND INSURANCE SETTLEMENTS. If the family is eligible to exclude its payments to an IRA/Keogh from taxation, those payments are reported as untaxed income. If payments to other pension funds are not excluded for tax purposes, they would already be included in the "adjusted gross income" figure. A student should report money paid into tax- sheltered or deferred annuities (paid directly or withheld from earnings). In addition, any payments from a pension, annuity, or insurance settlement must be reported on the application, either as taxable income, or untaxed income, as appropriate. The full amount of the distribution must be reported, whether it was a lump-sum or an annual distribution. The only exception to reporting pension distributions as income is when the pension distribution is "rolled over" to another retirement plan in the same tax year. BENEFITS RECEIVED ON BEHALF OF DEPENDENTS. Any benefits received by the head of household on behalf of persons included in household size (Section F) must be reported as income to the head of the household. However, if members of the household, such as an aunt or grandmother, receive benefits in their own names, those benefits are not reported as income of the head of household. Remember that siblings of the student and "other persons" may not be included in household size if they receive in their own name more than half of their support through such benefits. UNDERPAYMENTS AND OVERPAYMENTS OF BENEFITS. The actual amount of benefits received for the year in question must be reported, even if that amount represents an underpayment or an overpayment that may be compensated for in the next year. This parallels the IRS treatment of overpayments of taxable income (such as salary) which must be reported and is taxed as any other income. However, if the underpayment or overpayment was adjusted in the same year, only the net amount received during that year would be reported. CASH SUPPORT TO STUDENT. Any cash support that the student receives from a friend or a relative (other than the parent, if the student is dependent) must be reported as untaxed income. Cash support includes payments made on behalf of the student. For instance, if the student's uncle pays the student's rent or utility bill, the student must report those payments as untaxed income on the application. HOUSING ALLOWANCES. Housing allowances provided to the parents or student must be reported. This applies to compensation that some people, particularly clergy and military personnel, receive for their jobs. If the parent or student receives money to pay for rent, he or she should list the amount of money received. If the parent receives use of a house or apartment, he or she should report the amount that he or she would pay to rent a comparable house or apartment (market value). Similarly, if the student received free room and board in the base year for a job that was not awarded as student financial aid, the student must report the value of the room and board as untaxed income. Excluded forms of income There are some cases in which income and benefits received by the student or parent should not be reported on the application: STUDENT FINANCIAL ASSISTANCE. With the exception of veterans educational and compensatory benefits, student financial assistance is not reported on the application, because such assistance does not affect the Federal Pell Grant, and is already taken into account as a resource for the campus-based programs and as estimated financial assistance for Stafford. (NOTE: Awards received by participants in the President's pilot national service program in the summer of 1993 should not be reported on the application.) WORK-STUDY EARNINGS. Ordinarily, earnings from work are reported as income on the financial aid application. However, if those earnings are part of a financial aid package and are intended as financial assistance to the student, they are not reported as income. SUBSIDIZED HOUSING. Rent subsidies paid by governmental and charitable organizations for low-income housing are not reported as untaxed income. FOOD STAMPS. Food stamps are not counted as income, but are regarded as "in-kind" assistance. Similarly, benefits from the following programs are not counted as untaxed income: Women, Infants, and Children Program, Food Distribution Program, Commodity Supplemental Food Program, National School Lunch and School Breakfast Programs, Summer Food Service Program, and Special Milk Program for Children. CHILD CARE BENEFITS. The worth of day care services provided by the Child Care Program and the Social Services Block Grant Programs should not be reported because they are a form of in-kind income. (NOTE: The Department of Health and Human Services provides reimbursement for child care expenses incurred by welfare recipients through AFDC. These benefits are reported on the application because the individual bills the State for the amount of child care costs incurred while on welfare, and is reimbursed on that basis.) PER CAPITA PAYMENTS TO NATIVE AMERICANS. Per capita payments should not be reported unless they exceed $2,000. These are payments made by the tribal government. Thus, if an individual payment was $1,500, it would not be reported on an application. However, if the payment was $2,500, only the amount that exceeds $2,000 would be reported as untaxed income ($500). HEATING/FUEL ASSISTANCE. Exclude from consideration as income or resources any payments or allowances under the Low Income Home Energy Assistance Act. (NOTE: Payments under the Low Income Home Energy Assistance [LIHEA] Act are made through state programs that may have different names.) 6 Questions About Reporting Income THESE ARE SOME OF THE MOST COMMON QUESTIONS ABOUT REPORTING INCOME THAT ARE RECEIVED AT THE DEPARTMENTS TOLL-FREE FEDERAL STUDENT AID INFORMATION CENTER. "Why do you ask for income information from the year before the student goes to school?" A: Studies have consistently shown that verifiable income tax information from the base year (1993 for the 1994-95 award year) is more accurate than projected (1994) information when estimating how much the family will be able to contribute during the coming school year. "What should the student do if the family has special circumstances that arent mentioned in the application?" A: Talk to the financial aid administrator. If the familys circumstances have changed from the base year (1993) due to loss of employment, loss of benefits, or death or divorce, the financial aid administrator may decide to adjust data elements used to calculate the students EFC, which may increase the students eligibility for student aid. "If the student lives with an aunt or grandparent, should that relatives income be reported instead of parental information?" A: Only if the relative is the students legal guardian, as defined on the application. The student can only be considered to be dependent on his or her parent(s) or guardian, and only parental/guardian information may be reported on the application. Any cash support given by relatives must be reported as untaxed income, but in-kind support (such as food and housing) from relatives is not reported. "What if the student lives with a girlfriend or boyfriend who pays rent?" A: The student should not report any information for a friend or roommate unless they are actually married or are considered to have a common-law marriage under state law. The student must report any cash support given by the friend as untaxed income, but in-kind support (such as food) from the friend is not reported. Note that the student would have to report the rent paid by the roommate as income if the students name was on the lease, and the roommate was paying the rent on the students behalf. "When is work considered student aid?" A: Generally, grants and scholarships are not considered to be taxed or untaxed income, and are not reported on the application. (The only exception is veterans educational benefits.) If the student has an ROTC scholarship, a Betty Crocker Scholarship, or any kind of grant or scholarship, that scholarship or grant will be considered as an available resource by the financial aid office when PACKAGING aid, but will not be reported as income on the application. In some cases, the student may have a job that was awarded as financial aid. The income from that job should not be reported on the application. If the students adjusted gross income (AGI) and taxes paid include income earned through a student financial aid program, that income must be subtracted from the AGI and taxes paid before they are reported on the application. For income to be excluded from the financial aid application, the job has to have been awarded to the student based on financial need. Thus, if the financial aid office gave the student a Stay-In-School job or a job as a Resident Advisor as a part of the students aid package, the income from that job would not be reported on the application. On the other hand, if the student got a job that was not awarded as part of the financial aid package, the income from that job would be reported on the application. "Whats the difference between cash support and in-kind support?" A: Cash support is support given either in the form of money, or money that is paid on behalf of the student. Cash support must be reported as untaxed income on the application. Thus, if a friend or relative gives the student grocery money, it must be reported as untaxed income. If the friend or relative pays the electric bill for the student, or part of the students rent, those payments must also be reported. In-kind support usually takes the form of free food or housing that is provided to the family, and is usually not reported on the application. So if the student is living rent-free with a friend or relative, the rental value is not reported as untaxed income unless the students name is on the lease. However, the application does require a student to report the value of housing that is provided to the family as compensation for a job. The most common example is free housing or a housing allowance provided to military personnel or clergy. |