Hidden Income: Beyond the AGI Lisanne Masterson Director, Financial Aid Brevard College

Session Objectives Who, What, Why, How & When –Institutional Methodology –Purpose –Policies & Procedures –Income vs. Assets Documents –Tax Returns –Depreciation –Passive vs. Non-passive Loss –Business Balance Sheet & Statement of Owner’s Equity

First Things First Verification –Includes reconciling conflicting information Professional Judgment –Special Circumstances Institutional Methodology

Who, What, Why, How & When Why make these changes Write policies and procedures to match your purpose Used only for calculating an EFC using Institutional Methodology Reviewing income, assets or both?

Purpose (Why?) What is your purpose in calculating an Institutional Methodology? –Limited resources, equity…. Are you looking for just hidden income or personal “choices”?

Institutional Methodology Remember, this is not “verification” & does not change federal eligibility Institutional policy backed by research Calculate internally or externally? The key is P&P & consistency

Policies & Procedures (What & How) Type of changes you will make –Income –Assets Who will make the changes What process will you use to make changes How/will the student be notified Consistency

Federal Tax Return Line items with potential “hidden income” –8a: Interest Income (Schedule B) –9a: Dividend Income (Schedule B) –12: Business Income (Schedule C) –13: Capital Gain/Loss (Schedule D) –17: Rental Real Estate, Royalties, Partnerships, S Corps, Trusts (Schedule E) –21: Other Income (Foreign Income Exclusion) Personal “Choices” – Schedule A

Supplemental Schedules Not required for verification If you have them, you must resolve conflicting information They may help in making professional judgment decisions, as well as finding hidden income

Schedules A & B Schedule A – Itemized Deductions Medical/Dental Expenses Home Mortgage Interest Gifts to Charity Schedule B – Interest & Dividends 1040 or 1040A, Lines 8a/8b & 9a/9b 1099-INT; 1099-DIV Asset

Business Financial Statements Income Statement –Revenue – Expenses = Net Income Statement of Owner’s Equity –Beginning Capital –Net Income –Withdrawals –Ending Capital Balance Sheet –Assets = –Liabilities + Owner’s Equity

Schedule C Profit/Loss From Sole Proprietorship Distinguish Between “Paper” Losses and Actual Losses (i.e. Depreciation – Part 2, Line 13) Request Business Financial Statements Net Profit/Loss, Line 31 => 1040, Line 12

Schedule D Capital Gain/Loss Distinguish Between “Paper” Losses and Actual Losses (i.e. Passive vs.Non- passive Income) Actual Gain/Loss Within That Calendar Year?

Schedule E Supplemental Income/Loss Part 1, Rental Real Estate –Are there any assets? –Depreciation Parts 2 & 3, Income/Loss from Partnerships, S Corps, Estates & Trusts »NOT income/wages »Non-passive Loss, Schedule K-1

Schedule E Partnerships & S Corporations –No tax at entity level but tax at partners’ level Form 1065 – US Return of Partnership Income) => Schedule K-1 => Schedule E => 1040 Line 17

Income/Tax Form/Documents Finances1040Documentation Employment Wages Sole-Proprietorship Line 7 Schedule C W-2 Form Accounting Books Trade/Business Partnership S Corp Schedule E K-1 of Form 1065 K-1 of Form 1120S Investment Income Interest/Dividend Capital Gains Rentals/Royalties Trust Funds Schedule B Schedule D Schedule E Form 1099 INT/DIV Form 1099-B Accounting Books K-1 of Form 1041

Income/Tax Form/Documents Retirement Funds Pension/Sharing Plans IRA Non-Qual. Compensation Line 16 Line 15 Line 7 or 16 Form 1099R, Broker/Bank Broker/Bank W-2, 1099-B, Broker/Bank Education Funds Hope/Lifetime Learning Qualified Tuition Line 49 N/A Form 1098-T Broker/Bank Personal Expenses Medical Student Loan Interest Mortgage State Income Tax Property Tax Schedule A Line 33 Schedule A Bank Lender statement Form 1098 W-2, Bank Tax Assessment statement

QUESTIONS!