I feel there are probably some end of the yer things that could be done to help lower one’s EFC. This is probably especially true this year because 2015 will be used for two years worth of financial aid in the FAFSA and Profile because of the move to using prior prior income numbers.
One item I’ve been reconsidering is prepaying my mortgage. I usually prepay January’s mortgage payment in December. That allows me deduct a bit more of my taxes this year. However, perhaps this is not the year to do that. If I understand how EFC is calculated with regard to income, taxes are subtracted out from income before assessing income for EFC. So a larger tax bill helps. No one wants a larger tax bill, but perhaps not lowering my tax bill by paying January’s mortgage in December would be better this year so I have two years with a lower EFC (because of the higher tax this year instead of next year). I haven’t really done the calculations but my guess is it’s not a big deal one way or the other.
Anyone have other possible suggestions for year end actions??
You could read “Paying for College Without Going Broke” for tips on lowering EFC. The truth is that for the vast majority of situations, there isn’t much that will make a difference in terms of actual aid. It’s one thing to lower EFC … it’s another thing to get increased aid as a result of a decreased EFC. But you can read up & enter scenarios into online EFC calculators to see what will happen … then try NPC’s to see what difference it might make to the aid.
Blossom’s rule says that it’s not worth doing anything to increase your aid unless it is also a smart financial decision in and of itself. The machinations to shift income and deductions into different tax years are worth it when they are smart financial planning tools (make your maximum retirement account contribution, for example. Always a smart financial move AND the assets in a retirement account are protected for financial aid purposes). But I’ve seen folks get burned moving things around… either it results in zero extra aid- and they’ve paid brokerage fees or financial aid counseling fees to boot, or it results in a small amount of extra aid which is wiped out by an unanticipated cost somewhere else.
So do your year end tax planning like always; fund your retirement, contribute to charity, sell your investment losses if you have a capital gain against which you can apply them. THEN evaluate if doing anything else is worth it. But don’t think the financial aid fairy is going to shower you with an extra 20K in aid because of late December machinations. Doesn’t work that way.
I agree with everything said. However, that doesn’t mean one should not explore possibilities. Having 2 years of financial aid based on 2015 certainly affect things. Perhaps you would not do some move because it’s not such a big deal. Having two years affected doubles the impact. I’m pretty new to this stuff, and therefore haven’t done much of anything.
Blossom - Why sell your investment losses if you have a capital gain against which you can apply them? If you can tax harvest a loss, you should do it irregardless of whether you have a gain for two reasons: 1) Some of the extra loss can offset income (which is taxed at a higher rate); 2) You can carry over extra losses.
Private- yes, that’s my point. Focus on the things which make good financial sense regardless of financial aid (which most people forget to do, or don’t make time to do, or can’t be bothered to do). The likely impact of a deduction here and there-- if you haven’t taken care of the basics- isn’t going to be significant.
I know people who routinely turn down overtime “because it hurts us in financial aid and it all goes to extra taxes anyway”. To me- sacrificing an extra 10K in income for an additional $500 in need based aid is short-sighted (especially if the person is at an income level where the extra money would result in being able to make a larger retirement contribution, i.e. not at the max already). To me, since some pensions are based on a lookback period and consider the highest earning years in calculations, turning down extra income is short-sighted. At my company, annual increases are considered based on “total comp”- so sandbagging your future raises for the sake of additional financial aid is a stupid decision.
and yet- people do it.
I’m not telling you NOT to look at all your options. Just make sure you are certain that you are contemplating a move which is a sound financial move- capital preservation, tax efficiency, and all the other ways you’d evaluate it… before you get seduced by extra aid.
Lots of colleges don’t promise to meet your full need anyway- so extra dough will always buy you more flexibility.
IF you are a business owner, and IF you have expenses that you need to pay anyway, and that won’t be added back (I.e., “hard” costs like salaries, supplies, rent of office space or equipment, etc.) on the CSS Profile, it may behoove you to shift those expenses to 2015, lowering your net compensation or distributions from a sole proprietorship, partnership, or S-Corp.
The goal is not increasing expenses, but shifting them from non-counting years to counting years. Because business expenses reduce my taxes, my self-employment taxes (if a sole prop), and my AGI (hence, our EFC), I have calculated that every dollar I spend on a business expense really only costs me about 50 cents (the rest I make back in reduced taxes and increased FA at my son’s “mets full need” school). So if I need to buy paper, pay rent, a new chair, and upgrade my software, it pays me to do it this year. I have done a lot of shopping this month, I’m fully stocked on most supplies for about 6 months, and will be buying a few more things tomorrow. All stuff I would have had to buy in early 2016 anyway, so I’m not spending any more. I’ve also held off on sending out a few bills; I’ll get paid in January, rather than December, shifting income OUT of 2015. (Because of prior-prior, 2015 will be tbe last year that counts for us, and it will count double.)
Most salaried or wage-based jobs do not allow this, however. And if your school doesn’t meet full need, it may not help even if you can do it.
If your school meets full need but adds back business deductions, as a number of schools do, it also won’t benefit you (although if you need the supplies, anyway, it’s not really a problem to take the chance).
True, but they haven’t seemed to add back many (if any) of my business deductions in the past 2 years. But I don’t take a home office, or many things that are “questionable” (depreciation, meals/entertainment, use of vehicle, etc.). My expenses are pretty ‘hard’, out-of-pocket costs that I wouldn’t have if I didn’t have a business.