1. Taxes and Financial Aid: A Two Way Street
Kathy Anderson
Colleen Russo
April 23, 2015

2. Agenda Financial Aid and Taxes Taxes and Financial Aid FAFSA/Profile
Verification
Taxes and Financial Aid
1098 T
Tax Credits/Deductions
College Savings Plans

3. About Financial Aid
Uses tax returns as a good estimate for current year income
Income and assets are calculated to come up with an estimate of a family’s ability to pay
Includes parent and student income and assets
Tax returns give clues about family’s financial strength as compared to others in the same pool
Every college uses the same formula to attempt to create a level playing field

4. FAFSA Completion Specific tax information is required AGI Taxes paid
Untaxed income
Number of exemptions
Filing status
Often uncovers a number of families who both file H of H, need to amend
Families are instructed to use the prior year’s tax return to complete the FAFSA. Families who are applying early are told to either estimate or to use the prior prior year’s information as a guide. After the family has submitted tax returns and paid a balance due (if they have one) they can use DRT to update.
No longer matters if a parent claims a student for federal dependency status. Years ago, if a parent did not claim the student and the student showed more than $4k in income the student was independent. No more.

5. FAFSA Completion - Timing
Most colleges have a deadline earlier than families complete their taxes
Colleges advise families to estimate income information based on prior prior year returns
May become a permanent change

6. CSS/Financial Aid PROFILE
Digs deeper:
Value of home
Retirement savings
Value of business
Value of any 529 plans for the student regardless of ownership
Schools with their own endowment will often ask families to complete the PROFILE in addition to the FAFSA
Cannot use IRS DRT for Profile

7. IRS Data Retrieval Tool
Presented to families as they complete FAFSA
Preferred option for returning students
Available to update FAFSA after filing

8. FAFSA IRS Data Retrieval Tool
Need PIN, SSN
Not everyone can use it:
Marital status mismatch/change
Taxes not completed
Amended return
Parents do not have valid SSNs
Change in home address from tax return
The DRT is available anywhere between 3 – 8 weeks (electronic or paper filing)

9. Retrievable Items Type of return filed AGI Tax Paid (federal)
Exemptions
Education Credits
IRA Deductions
Tax Exempt Interest Income
Untaxed IRA Distributions
Untaxed Pensions
Income earned from work, including K-1 earnings

10. Common Errors Taxes withheld vs. taxes paid Marital status mismatch
Omitting assets
Type of tax return filed (or could have filed)
Untaxed Income
IRA Deductions
Retirement plan contributions
Tax exempt interest
These errors often trip a “flag” in the processing system for verification.
One REALLY important area to be aware: the Coulda woulda shoulda. Many people without knowledge of tax returns need to know if they could have filed a 1040 A or EZ. (no itemizing, not self employed, etc). This is important because their assets would not be considered.

11. Verification
Students and families need to document information provided on FAFSA.
Designed to minimize fraud
Must provide an IRS Tax Transcript and complete a worksheet
PROFILE schools use tax returns
ALL schedules
Parents and students need to respond to requests from schools ASAP.
Can hold up aid processing

12. Other Verification Items
Household Size
Number in College
Child Support Paid
SNAP (food stamps)
High school completion
Identity and statement of educational purpose
Other untaxed income
HH size does not equal exemptions
Number in college does not include parents; students at military schools
Untaxed income does NOT include the following:
Student aid
Veteran’s education benefits
On-base housing
Rental subsidies
Payments from foster care or adoption assistance
Payments to Native Americans
Heating or fuel subsidies
FSA accounts
Welfare, untaxed ss benefits, eic and additional child tax credits
Combat pay, foreign income exclusions, credit for tax on special fuels
In kind support

13. Conflicting Information
Financial aid administrators must possess basic tax knowledge, such as:
Whether or not someone was required to file
Correct filing status
Claimed as an exemption by more than 1 person
Claiming dependents
Cannot disburse aid until issues are resolved
May need to have student/parent refile

14. Extensions Schools must proceed with verification using the following:
Taxes paid from Form 4868
Income Earned from Work from w2 or signed statements
Verification worksheet for other information

15. 1098T Form

16. 1098T: Reported in Box 1 Qualified Tuition and Related Expenses
Books, if billed by institution
Fees
Malpractice insurance
Miscellaneous MANDATORY fees
Qualified Tuition and Related Expenses

17. 1098T - Not Reported in Box 1 Tuition for non-degree courses
Meal plans, dining hall
Health insurance charges
Housing costs
Late payment fees
Fines
Parking fees
Transportation fees
Personal benefit factors in. Unless it is fully mandatory it does not count for the 1098 T. Additionally, fines are not considered “mandatory,” nor are student health fees/health insurance even though they are required by the school or the state.

18. 1098T - Reported in Box 5 Payments, Scholarships and Grants
Third party billing arrangements
DoD Tuition Assistance
Pell, SEOG grants
Institutional or outside scholarships/grants
Veterans’ Benefits where VA pays Institution
Any grant or “free money” that limits out of pocket costs

19. 1098T – Not Reported in Box 5
Corporate or employer assistance not administered by college
Exchange/consortium students
Private Scholarship, trust or family trust
Distributions from a 529 plan
Tuition waivers
VA Benefits paid directly to student

20. Saving for College: 529 Plans
529 Plans allow parents or others to put away after tax money to save for college
Earnings for qualified expenses are tax free at withdrawal
Counted as a resource of the owner for financial aid
Two types: Prepaid tuition and savings plans
You have several ways to withdraw money (take a distribution) from your Fidelity-managed 529 Plan account:
Pay college bills online by enrolling now in Fidelity BillPay® for 529 accounts.
Call a Fidelity representative at
Complete the College Investing Plan Distribution form (PDF).
For money sent to the Beneficiary or directly to his/her school, a Form 1099-Q will go to the Beneficiary, who will be considered the recipient of the money for tax purposes. For all other withdrawals, the Participant will be considered to have received the money and will be sent a Form 1099-Q. Additional documentation (college invoice, statement, receipts) may be required by the IRS to verify that such payments are qualified.

21. 529 Plans - Saving Almost every state has at least one plan
Offered by a branch of state government
Managed by a brokerage house or investment firm
U Fund in Massachusetts
Gains are tax-free when used for qualified higher education expenses at an eligible school
Tuition, required fees, books, room and board

22. 529 Plans - Withdrawals Funds can be sent directly to college
Should allow processing time
Can be used for installments
Funds can go to beneficiary
1099Q will go in beneficiary’s SSN
No tax penalty if student gets a tax-free scholarship
Gains are taxed
Should time withdrawals to be within the tax year

23. 529 Plans: Prepaid Tuition
Lock in a percentage of tuition
Most plans limit participation to state schools
Most funds invest in stock market
Many programs were hurt by 2008 crash
Many state programs are not accepting new participants

24. 529 Plans – Prepaid Tuition
U Plan is unique:
Invested in tax-exempt general obligation bonds issued by the Commonwealth
80 participating colleges and universities in MA
Earns interest at the rate of CPI
Get entire investment plus interest back if student does not attend a participating college
Withdrawals are tax-free
Limited to tuition and fees

25. U.Plan Example
Lock in a percentage of tuition at each participating college
Colleges agree to keep borrowers “whole” if tuition is above CPI
Do not need to select a college when opening an account
Private College 529 plan is structured similarly
College
Current Cost
Investment
Percentage
Community college
$5,000
$2500
50%
Public College
$10,000
25%
Private College
$25,000
10%

26. U.Plan Withdrawals
Family requests funds be sent to participating college
Money is applied directly to the bill
Students who do not attend a participating college get funds back with interest
Tax-free withdrawals
Can be used for tuition and fees only

27. Tax Deductions Expiring soon Not high on federal relations agendas –
Does not encourage enrollment
Not available up front for tuition payments
Cost federal government $23 billion

28. Thank you
Colleen Russo Vice President of Educational Funding Porter and Chester Institute (860)
Kathy Anderson Director of Financial Aid MGH Institute of Health Professions