Part: 3 - - Completing The FAFSA
SectionTitle: Section E "1997 Income, Earnings, and Benefits"
Section E "1997 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 educational costs.
Section E 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 1998-99 is the 1997 tax year. Each question gives the line reference to the 1997 IRS tax form. Estimated base-year income for the tax year may be used if the family has not yet filed its 1997 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 51 or 63, a student and/or parent must indicate from which tax form they are getting the information for this section of the FAFSA. Sometimes a 1997 IRS Form 1040 is filed even though a 1040A, 1040EZ, or 1040TEL could have been filed. In such an instance, a student or parent should indicate eligibility to file a 1040A, 1040EZ, or 1040TEL 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.
[[This file contains the graphic of FAFSA questions 53 and 63 in Portable Document Format (PDF). It can be viewed with version 3.0 or greater of the free Adobe Acrobat Reader software.]]
If a student and his or her parents or spouse, as applicable, don't 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 income.
[[This file contains the graphic of FAFSA Worksheet #1 in Portable Document Format (PDF). It can be viewed with version 3.0 or greater of the free Adobe Acrobat Reader software.]]
Alternative Tax Return Forms
One of the following 1997 income tax forms may be listed on the FAFSA as an alternative to Form 1040A, 1040EZ, or 1040TEL: the income tax return required by 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, 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 AGI 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 the central government of that country, the income should be reported as untaxed income.)
Form 2555. In many cases, if a student or parent files a return with the IRS 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 FWS 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 AGI is reported.
Untaxed Income and Benefits
Questions 57-61 and Questions 69-73 include separate line items to collect information about untaxed income and benefits. Line items include Earned Income Credit, Social Security benefits, Temporary Assistance to Needy Families (TANF-Tempo, the state-administered plans that replaced 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.
[[This file contains the graphic of FAFSA Questions 57-61 and Questions 69-73 for Untaxed Income and Benefits in Portable Document Format (PDF). It can be viewed with version 3.0 or greater of the free Adobe Acrobat Reader software.]]
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 (also known as "cafeteria plans"), because these are essentially employee benefit programs.
Students must be sure that Question 61 or 73, "Other untaxed income and benefits," does not include any of the benefits already reported in previous line items. Worksheet 2 on page 11 of the FAFSA instructions will help students calculate their untaxed income and benefits.
[[This file contains the graphic of FAFSA Worksheet #2 in Portable Document Format (PDF). It can be viewed with version 3.0 or greater of the free Adobe Acrobat Reader software.]]
Any cash support that the student receives from a friend or 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 AGI. 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 D) 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, 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 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.
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.)
Certain income and benefits the student or parent received 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 Pell Grant the student receives and is already taken into account as a resource for campus-based aid and as estimated financial assistance for FFEL and Direct Loans.
Food stamps. Food stamps are regarded as "in-kind" assistance. 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 daycare services provided by government or private programs should not be reported, as they are a form of in-kind income. (Note: Some states provide reimbursement for childcare expenses incurred by welfare recipients through AFDC or TANF. These benefits are reported on the application because the individual bills the state for the amount of childcare costs incurred while on welfare and is reimbursed on that basis.)
Per capita payments to Native Americans. Per capita payments received in 1997 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 62 and 74 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 a student 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 53, 55, 56, 65, 67, and 68. These amounts should be calculated on the basis of what was received between January 1, 1997 and December 31, 1997, 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 1997 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 1997 by the student, spouse, or parent whose income is reported on the FAFSA should be reported as an exclusion.
[[This file contains the graphic of FAFSA Worksheet #3 in Portable Document Format (PDF). It can be viewed with version 3.0 or greater of the free Adobe Acrobat Reader software.]]
Questions about Reporting Income
Some of the most common questions about reporting income that the Department's FSAIC receives follow:
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 (1997 for the 1998-99 award year) is more accurate than projected (1998) 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 FAA. If a family's circumstances have changed from the base year (1997) due to loss of employment, loss of benefits, or death or divorce, the FAA 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 be considered to be dependent only on his or her parent(s) or guardian and may report only parental/guardian information on the FAFSA. The student must report any cash support given by relatives, but not in-kind support (such as food and housing) from relatives.
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 should not report in-kind support (such as food). The student would have to report as income the rent the roommate paid 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. 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 62 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 62 as an exclusion. In addition, the student should report grants and scholarships that are reported on the tax return (because they are in excess of tuition, fees, books, and required supplies). The student should report these items in Question 62 as an exclusion. Worksheet #3 on page 12 of the FAFSA will help students answer Question 62.
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. The student must report cash support as untaxed income. 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 student's electric bill or part of the student's rent, the student must report those payments.
Examples of in-kind support are free food or housing that the family receives. The student usually doesn't report such support. So, if the student is living rent-free with a friend or relative, the student does not report rental value 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 the family receives as compensation for a job. The most common example is free housing or a housing allowance provided to military personnel or clergy.