Part: 3 - - Filling out the Free Application for Federal Student Aid
SectionTitle: Section F "1996 Income, Earnings, and Benefits"
Section F "1996 Income, Earnings, and Benefits"
Purpose: The EFC calculation uses a family's income from this
section and 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
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
1997 98 is the 1996 tax year. Each question gives the line reference to
the 1996 IRS tax form. Estimated base-year income for the tax year
may be used if the family has not yet filed its 1996 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 1996 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. (As noted on page 5 of the FAFSA instructions: for the
1040TEL--tax filing by telephone--the student would fill in the oval
for either the completed or estimated 1996 IRS Form 1040EZ in
questions 53 and/or 65.)
If a student and his or her parents or spouse, as applicable, do not file
and are not required to 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
Alternative tax return forms
For the purpose of completing the FAFSA, one of the following
1996 income tax forms may be filed as an alternative to filing a Form
1040A or 1040EZ: the income tax return required by the tax code of
the Commonwealth of Puerto Rico, Guam, American Samoa, the
Virgin Islands, the Republic of the Marshall Islands, the Federal
States of Micronesia, or Palau.
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 and other need-based employment earnings) 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
Please note that as of 1997-98, filers must report VA Educational
Work-Study allowances as untaxed income. Also, the instructions
now inform applicants not to include contributions to, or payments
from, flexible spending arrangements such as cafeteria plans.
Students must be sure that Question 63 or 75, "Other untaxed income
and benefits," does not include any of the benefits already reported
elsewhere on the form. Worksheet #2 on page 11 of the FAFSA
instructions will help students calculate their untaxed income and
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.
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
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 on the
FAFSA. (Remember, such persons may not be included in
household size if they receive in their own names more than half
of their support through such benefits.) 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
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.
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
Certain income and benefits received by the student or parent should
not be reported on the application. Worksheet #2 lists some of these:
Student financial aid. Student aid has no effect on the
amount of a Federal Pell Grant the student receives and is already
taken into account as a resource for campus-based aid and as
estimated financial assistance for Stafford.
Food stamps. Food stamps are regarded as "in kind" assistance.
Similarly, benefits received from a federal, state, or local
government for 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 1996 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 55, 57, and 58, or 67, 69, and 70. These amounts
should be calculated on the basis of what was received between
January 1, 1996 and December 31, 1996, 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 1996 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 people
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 1996 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
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 (1996 for the 1997-98 award year) is
more accurate than projected (1997) information when estimating
how much the family will be able to contribute during the coming
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 (1996) 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 adoptive parent or 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
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
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
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.