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Capital Gains Distributions is income. Taxable Capital Gains is not additional income.

oorhaioorhai 25 replies4 threads Junior Member
My husband and I have both retired. My husband draws small pension. We are liquidating non-IRA assets held in mutual funds to meet both our annual expenses and our son's college tuition. The mutual funds are counted as assets available to pay tuition and typically CSS Profile assess out-of-IRA assets at 5% per year for tuition. That is fine by us.

We have long-held mutual funds and so the capital has accrued a lot of gain. When we sell the mutual funds to pay for tuition and expenses, we incur taxable capital gains. That is also fine by us.

Our problem is that the college seems unable to differentiate between capital gains distributions, which is income, and taxable capital gains which are a part of assets being liquidated, and which is not income.

The college is counting the capital gains that is subject to federal and state tax as additional income and responds by saying - you may not see it as income, but we do. That is ridiculous.

Say the CSS profile says we could pay 10K annually from our assets (5% of assets). If we withdrew 10K from FDs or from our savings account, the college would not count it as additional income. But if we cash 10K from mutual funds of which 5K is gain, why should the college count the 5K as additional income? I fully see why the IRS wants to tax the 5K in gain, and, as I said, that is fine. But all the college should care about is that we should pay 10K from our assets.

I've tried saying this in multiple ways and have had no luck getting this point across to the Financial Aid office. Can someone help?
14 replies
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Replies to: Capital Gains Distributions is income. Taxable Capital Gains is not additional income.

  • thumper1thumper1 77090 replies3425 threads Senior Member
    @BelknapPoint our thoughts?

    @oorhai there are lots of things that are not taxable income for income tax purposes that ARE viewed as income for financial aid purposes.
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  • oorhaioorhai 25 replies4 threads Junior Member
    Please only respond if you get my question and have some financial expertise. I'm not looking for vague responses. We have an income of X and assets of Y. Both are used to determine our EFC. Y may be in shares. Y may be in my savings account. Y may be in an FD or in my house. It is still Y. A portion of Y does not change into X just because I sell shares.
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  • politepersonpoliteperson 490 replies4 threads Member
    edited January 21
    I don’t think you’re going to be able to convince anyone that realized capital gains don’t count as income. Your best bet from a FA perspective would have been to convert those equities to a money market fund prior to the base year for FA. The best you can do now is delay realizing those gains to the extent possible. In some cases, loans might make sense until soph. Spring. But you’ll need to do the math and keep the big picture—taxes, not just a FA—in mind. If you want to look on the bright side: at least you have capital gains and not losses.
    edited January 21
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  • politepersonpoliteperson 490 replies4 threads Member
    @oorhai I was typing during your second post. Adding to my post above...I understand your frustration. But you’re misrepresenting the way things work. You have *unrealized* gains in your mutual funds. When you realize those gains by selling shares, it is viewed as income (by everyone, not just FA offices). In fact, it was income before you realized the gains by selling, it’s just that the IRS and FA offices only recognize the gain when shares are sold. The FA offices could just as easily treat the unrealized gains as income available for college but they don’t.
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  • SybyllaSybylla 4487 replies56 threads Senior Member
    edited January 21
    Some schools will tap into your Y whatever, where did you get that 5% figure for assets via CSS? You think this is an across the board figure, not school dependent?
    edited January 21
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  • oorhaioorhai 25 replies4 threads Junior Member
    That's what I recall. Some part of your non-IRA savings is protected and the part depends on your age. The remaining is subject to a 5% usage per year.
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  • thumper1thumper1 77090 replies3425 threads Senior Member
    edited January 21
    @oorhai

    I totally “get” your question...and flagged a poster who might have good info to give you specifically.

    I stand by my comment...there are plenty of things the IRS doesn’t view as “income” (e.g. some deductions taken by business owners) but the financial aid offices DO consider these as a source of income.

    The others who have responded were clear. Hoping @BelknapPoint and maybe @Madison85 respond.

    ETA..I see you said OUT of IRA assets are being tapped at about 5%. Profile schools can actually tap any %age they choose. The 5.6% asset tap is for FAFSA calculations. There is an asset protection allowance that has gotten smaller and smaller. I think it might be less than $30,000 a year now. After that, all of your assets are assessed for FAFSA purposes. There is NO asset protection allowance uniformly used by Profile Schools.
    edited January 21
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  • SybyllaSybylla 4487 replies56 threads Senior Member
    edited January 21
    I don't think there is a 5% assets cap in every CSS school scenario at all.

    >>typically CSS Profile assess out-of-IRA assets at 5% per year for tuition. That is fine by us.<<

    Color me shocked if that is a thing. I assume the MF, liquidated or not, is available for tuition. What assets are we talking in numbers?
    edited January 21
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  • tdy123tdy123 1040 replies18 threads Senior Member
    edited January 21
    The work around is to take a second mortgage or move mutual funds into a brokerage account and take loans against the mutual fund balance. Loan proceeds are neither taxable income nor capital gains.

    Then clear the loan balances after fin aid is no longer an issue.
    edited January 21
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  • SybyllaSybylla 4487 replies56 threads Senior Member
    edited January 21
    I think this kid is late in his college career, it looks like this would be a jr and the school has all the history (no FA) thus far. It seems OP has tried before to get FA to negotiate. I think financial gymnastics should be approached with caution. So is the question is, does Oberlin cap non retirement assets at 5%?
    edited January 21
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  • oorhaioorhai 25 replies4 threads Junior Member
    So I now realize now. Too late, unfortunately.
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  • SybyllaSybylla 4487 replies56 threads Senior Member
    Did your kid lose his merit award?
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  • thumper1thumper1 77090 replies3425 threads Senior Member
    edited January 21
    Did you cash in your mutual funds in 2018? That is the income tax year used for the 2020-2021 FAFSA and Profile forms?

    IIRC from other threads, you were employed most of 2018, right?

    What year in college will this student be in 2020-2021? A senior?
    edited January 21
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  • oorhaioorhai 25 replies4 threads Junior Member
    Thanks all. My questions have been answered.
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