| 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. |