mathmomvt

My DS just got his financial aid award for his sophomore year, and our contribution went up more than I expected compared to freshman year. We did earn more in 2011 than in 2010, so I'm not surprised that it went up, but I'm surprised by the amount.

One thing I think may be a confounding factor is that in 2011 we got a fairly large state tax refund. Unfortunately from a finaid perspective, this counts in our AGI for 2011. However, since the state tax deduction comes out "on page 2" with our standardized deductions, that money was counted in our AGI in both 2010 and 2011. (Yes, I know it's good to avoid in general, but my DH is self-employed with a pretty volatile and unpredictable income, so I err on the conservative side to avoid penalties.) It seems to me that income that was counted in 2010 for finaid purposes should not also be counted in 2011.

DS goes to a Profile school that meets full need. Do you think the school would already have taken something like that into account, and if no, do you think it would have any impact if I asked about it? What would be the right way to inquire about something like this?

Thanks

cptofthehouse

You can always ask. And you should always ask because sometimes mistakes are made. It's always important to understand as closely as you can, how your school is calculating need.

However, yes, you are probably right. Since taxes are taken out of income used, when you get a state refund, it is added back in there. I've known folks who overpaid their state taxes, their last year of financial aid, and gotten their income figure down for aid purposes, since the next year's return would not be used or even examined for aid purposes. Also, most all schools increase the student's expected contribution each year, as they expect the student to take a larger role in paying college expenses. Also, some schools have aid formulas with categories in them, and if you get bumped up into a different category, the result can be different from a proportional increase or decrease that one might expect.

mathmomvt

But overpaying your state taxes does not get your income figure down for aid purposes, as it comes out "below the line" so to speak, after AGI is computed. It reduces your federal tax for that year because you have a high state tax deduction, but if anything that hurts you for financial aid.

The student contribution is the other thing I need to find out. It was broken out clearly last year but not this year. I know my student's part will have increased both because he is a sophomore and because he had more income.

Is it better to call or email with financial aid questions? I was thinking email would give me more of a "paper trail" and allow the question to maybe be referred to the correct person rather than some student trying to answer?

sylvan8798

Does the Profile make a certain allowance for state taxes based on which state you live in? i.e. aren't there some states with no state income tax? It seems like there would be an adjustment since those people would have more money to spend on tuition than, say, New Yorkers.

If that were the case, then you would have been allotted more for 2011 than you actually paid, since the net amount you paid was reduced by the refund. That would offset counting it as income. Maybe.

mathmomvt

I think there is a state tax allowance, but it's based on your actual income, and not how much you made in estimated payments.

sylvan8798

That's what I meant - but then in one year if your "allowance" was $12K and you actually paid $15K, then in the next year your "allowance" was $13K, but you only paid $10K because you got a $3K refund. Or something like that...

mathmomvt

The allowances should end up totaling to the amount I paid (to the extent that the allowances are accurate -- I have no idea) but they don't compensate for the fact that my AGI was "falsely" inflated the year I got the refund. My AGI was not reduced the year I over paid. So that doesn't balance out.

Madison85

My kids go to a FAFSA only school. I see the state tax overpayment/refund showing up in AGI the next year as an inequity in the EFC calculation.

First, the taxpayer obtains no benefit from overpaying state income taxes in the previous year (actually, an overpayment increases the EFC since it decreases the federal income tax liability for people who itemize), and next, the AGI is 'inflated' in the current year for the state refund included in income. A double whammy.

Tax planning for EFC purposes could include trying to slightly underpay state income taxes, rather than overpay.

mathmomvt

Madison, definitely worth trying to plan for, though a challenge with an unpredictable income stream.

sylvan8798

Does the FAFSA use the actual federal tax that people paid? Because that would then provide an allowance for things like their mortgage interest, property taxes, etc. It was my understanding that lifestyle was not considered?

OP, I would run some numbers to see whether that was actually the source of the problem or not.

mathmomvt

It's a profile school, so I really have no way of running the numbers as I don't know their formula.

FAFSA uses the actual federal tax people pay -- that doesn't give them an allowance for their deductions -- to the contrary, if you pay less tax, you get less of an allowance for it.

daniel1234now

@Madison85 can you help me with information regarding UW Madison? I just want to know details about their spring semester and how it differs from the fall? I applied for the January 2013 Freshman term.

lookingforward

I've run the ifap formula testing with various dollar amounts. It's only the Fafsa thing, but intersting to see how different Fed refunds affect the bottom line.

I suspect the problem may at least partly be the bump in self-employment income. I've seen whoever it is that regulates CSS admit that the formulas for self-employed are flawed and to be corrected- but have not heard that they have been.

I struggle with the logic of much of all this, but understand it this way. In 2011, when you entered the state tax figure on line 5 of 2010's Schedule A, it was "state and local income taxes withheld," as shown on the W2 for 2010. That whole amount is the immediate deduction you get on your 2010 Fed taxes. So, when you get a state refund, in 2011, that's the overage. In effect, you credited yourself for, say 5k state tax in 2010's IRS forms but only ended up owing 4k to your state. The refund is money in your pocket, received in 2011, reported on the 2011 Fed taxes, to account for the discrepancy.

This is a "look back." Your AGI may not have been lowered, but your Line 40 on page two, Itemized Deductions from Schedule A, for 2010, was higher because you didn't include, in this example, the exact 4k in taxes you paid your state-- you used the full withheld figure.

Head spinning yet?

mathmomvt

For taxes, it makes perfect sense -- I got a deduction from income that was too high in 2010, so they take it back in 2011. Perfectly fair and right in terms of the taxes.

Where it is messed up is only in terms of financial aid, because AGI is a major number used for financial aid formulas, and that income gets double-counted for financial aid purposes. I've contacted financial aid about this. I'll let people know if I learn anything useful. (There's another issue with our file and I've been concentrating on that one first, so haven't gotten any feedback on the tax refund issue yet.)

mathmomvt

Actually, it's not *just* financial aid where you can run into problems -- also if you are close to the phase-out AGI level for any deductions, you definitely don't want that income counted twice in your AGI. Something I never thought about before. Just figured I'd play it safe with the state estimated tax payments and it would all come out in the wash. But... if you have anything that relies on your AGI being "accurate" you can really lose out that way. Hope this thread helps someone else avoid this pitfall.