Maintained for Historical Purposes

This resource is being maintained for historical purposes only and is not currently applicable.

Section F "1995 Income, Earnings, and Benefits"

AwardYear: 1996-1997
Edition: PostSecondary
Part: 3 - - Filling out the Free Application for Federal Student Aid
SectionNumber:
SectionTitle: Section F "1995 Income, Earnings, and Benefits"

PageNumbers: 72-78


PURPOSE: The EFC calculation compares a 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
has discretionary income, a portion, and only a portion, of that
income is included in the EFC as available for the student's
educational costs.

Section F collects information on the BASE-YEAR INCOME of the
parents (if the student is dependent) and of the student and spouse
(if applicable), as well as income tax paid, tax-filing status, and the
number of exemptions claimed. The base year for applicants for
1996-97 is the 1995 tax year. Each question gives the line reference
to the 1995 IRS tax form. Estimated base-year income for the tax
year may be used if the family has not yet filed its 1995 tax return.
However, if it turns out that the estimated information is incorrect,
the student must make corrections when the tax return is filed.

When completing Questions 53 or 65, a student and/or parent must
indicate from which tax form they are getting the information for this
section of the FAFSA. Sometimes a 1995 IRS Form 1040 is filed
even though a 1040A or 1040EZ could have been filed. In such an
instance, a student or parent should indicate eligibility to file a
1040A or 1040EZ by checking Box A if a tax return has been filed
or Box C if a tax return has not been filed at the time the FAFSA is
completed.

If a student and his or her parents or spouse, as applicable, don't file
a tax return, or have not yet filed it, they still must report their
earnings. In this case, W-2 forms and other such records should be
used to answer the questions. Worksheet #1 on page 11 of the
FAFSA instructions will help students calculate income.


PUERTO RICO TAX RETURN

For the purpose of completing the FAFSA, a Puerto Rico tax return
is considered to be an IRS Form 1040A or 1040EZ. The information
from the Puerto Rico tax return should be used to complete the
FAFSA.


FOREIGN INCOME

Income earned in a foreign country is treated in the same way as
income earned in the United States--that is, as if taxes were paid to
the central government of that country. A foreign tax return is
considered to be an IRS Form 1040 for the purpose of completing
the FAFSA. A student should report the value of the foreign income
in U.S. dollars (using the exchange rate at the time of application) as
the "adjusted gross income" line item and as the "income earned
from work" line item.

A 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 a 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 U.S. tax purposes. The figure
reported on line 43 of Form 2555 (or line 18 of Form 2555EZ)
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 (including Federal
Work-Study) are used to calculate the Social Security tax allowances
and the employment expense allowance. The income earned from
work will also be used in the EFC calculation as an income factor
when no adjusted gross income is reported on the application.


UNTAXED INCOME AND BENEFITS

Questions 59-63 and Questions 71-75 include separate line items to
collect information about "Untaxed income and benefits." Line items
include Earned Income Credit, Social Security benefits, Aid to
Families with Dependent Children (AFDC or ADC) 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 parents on behalf of a 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 Question 63 or 75, "Other untaxed income
and benefits," does not include any of the 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. Worksheet #2 on
page 11 of the FAFSA instructions will help students calculate their
untaxed income and benefits.

Any cash support received from a family member or third party
should also be reported here as untaxed income. In some cases, the
value of housing or payments on behalf of a student must be
reported. Other items to report here include:

INCOME EXCLUSIONS ON IRS FORM. Two examples are the
untaxed portion of capital gains and the interest and dividend
exclusion. Even though they are not taxed by the federal
government, both must be reported on the application for
financial aid purposes, as they represent additional financial
resources available to the family.

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
adjusted gross income. A student should report money paid into
tax-sheltered or deferred annuities (whether 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 E) must be reported as income
to the head of the household. However, if members of the household,
such as an uncle or grandmother, receive benefits in their own
names, those benefits are not reported as income of the head of
household. Remember that the student's siblings and "other persons"
may not be included in household size if they receive in their own
names more than half of their support through such benefits. Note
that because student financial aid is not counted as income, tuition
benefits a parent receives for a dependent (for example, from the
parent's employer) are not included as untaxed income but as a
resource and as estimated financial assistance.

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) that must be reported and are 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 aunt 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 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. (This category, "housing allowances,"
excludes rent subsidies for low-income housing.)

There are some cases in which income and benefits received by the
student or parent should not be reported on the application.
Worksheet #2 lists types of income and benefits that should not be
included as untaxed income. Some of these are:

STUDENT FINANCIAL AID. Student aid is not counted as
income; it has no effect on the amount of a Federal Pell Grant the
student receives and is already taken into account as resources for
campus-based aid and as estimated financial assistance for
Stafford.

FOOD STAMPS. Food stamps are not counted as untaxed
income; they 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, as they are a form of in-kind
income. (Note: The U.S. Department of Health and Human Services
provides reimbursement for child-care expenses incurred by welfare
recipients through Aid to Families with Dependent Children
[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 received in 1995 from the Per Capita Act or the
Distribution of Judgment Funds Act should not be reported unless
they exceed $2,000. Thus, if an individual payment were $1,500, it
would not be reported on an application. However, if the payment
were $2,500, the amount that exceeds $2,000--$500--would be
reported as untaxed income.

HEATING/FUEL ASSISTANCE. Exclude from consideration as
income or resources any payments or allowances received under the
Low-Income Home Energy Assistance Act (LIHEA). (Note:
Payments under the LIHEA are made through state programs that
may have different names.)


EXCLUSIONS FROM TAXED INCOME

Questions 64 and 76 ask for the total of income and benefits that are
to be excluded from taxable income. Worksheet #3 on page 12 of the
FAFSA instructions will help students calculate exclusions for
amounts included in taxed income, such as work-study earnings.
Because the items listed in this worksheet will be entered on the form
and excluded from income in the calculation, the student should not
subtract them from the income listed in Questions 56-58 or 68-70.
These amounts should be calculated on the basis of what was
received between January 1, 1995 and December 31, 1995, NOT ON
WHAT WAS RECEIVED DURING THE SCHOOL YEAR.

GRANT AND SCHOLARSHIP AID. Any grant and scholarship
aid that was reported on the student's 1995 income tax form
(because it was in excess of tuition, fees, books, and required
supplies) should be reported as an exclusion.

WORK-STUDY EARNINGS. Earnings from work are reported
as income on the financial aid application as part of AGI or
income earned. However, if those earnings are part of a financial
aid package and are intended as need-based financial assistance
to the student, they are also reported as an exclusion from taxed
income.

NATIONAL AND COMMUNITY SERVICE LIVING
ALLOWANCE AND BENEFITS. The National and Community
Service Trust Act of 1993 allows young adults to earn
postsecondary tuition funds by filling unmet community needs.
Any living allowance or benefits received under this program
should be reported as an exclusion. Any earnings received under
this program are not reported as an exclusion.

CHILD-SUPPORT PAYMENTS. Any child-support payments
made during 1995 by the student, spouse, or parent whose income
is reported on the FAFSA should be reported as an exclusion.


QUESTIONS ABOUT REPORTING INCOME

These are some of the most common questions about reporting
income that are received at the Department's Federal Student Aid
Information Center.

WHY DO YOU ASK FOR INCOME INFORMATION FROM THE
YEAR BEFORE THE STUDENT GOES TO SCHOOL?

Studies have consistently shown that verifiable income tax
information from the base year (1995 for the 1996-97 award year) is
more accurate than projected (1996) 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 AREN'T MENTIONED IN
THE APPLICATION?

Talk to the financial aid administrator. If a family's circumstances
have changed from the base year (1995) 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 student's
EFC, which may increase the student's eligibility for student aid.

IF THE STUDENT LIVES WITH AN AUNT, UNCLE, OR
GRANDPARENT, SHOULD THAT RELATIVE'S INCOME BE
REPORTED INSTEAD OF PARENTAL INFORMATION?

Only if the relative is the student's legal guardian, as defined on the
FAFSA. 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 FAFSA. 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 THE RENT?

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) given is not reported. Note that the student
would have to report the rent paid by the roommate as income if the
student's name were on the lease and if the roommate were paying
the rent on the student's behalf.

WHEN IS WORK CONSIDERED STUDENT AID?

Generally, grants and scholarships are not considered to be taxed or
untaxed income as long as they are applied to tuition, fees, books,
and required supplies. If the student has an ROTC scholarship, a
private scholarship, or any other 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
need-based financial aid. The income from that job should be
reported in Question 64 as an exclusion from income. For income
to be excluded, 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
student's aid package, the income from that job would be reported as
an exclusion. On the other hand, if the student got a job that was not
awarded as part of the student's financial aid package, the income
from that job would not be reported in Question 64 as an exclusion.
In addition, grants and scholarships that are reported on the tax
return (because they are in excess of tuition, fees, books, and
required supplies) should be reported in Question 64 as an exclusion.
Worksheet #3 on page 12 of the FAFSA will help students answer
Question 64.

WHAT'S THE DIFFERENCE BETWEEN CASH SUPPORT AND
IN-KIND SUPPORT?

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 student's 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 student's 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.

Last Modified: 06/28/1998