Untaxed Vs. Taxed

Jugulator20
Mon, 24 Jul 2006 14:36:40 +0000

Sorry about the length of the post.

I’m only talking about FAFSA (not the Profile) and federal financial aid (Pell grants, Stafford loans, etc). First, FAFSA is essentially a computer program. You file (preferably online) and the computer program (FAFSA) spits out a number, or EFC. When determining federal financial aid, aid officers rely on the EFC as calculated by FAFSA. Aid officers can tinker when it comes to granting their own school’s money, however.

That said, most combat zone pay is exempt from federal income tax, and is thus considered untaxable income for FAFSA purposes. You still however must report this untaxable income on FAFSA (worksheet B). However, one of the key lines when FAFSA calculates an EFC is what is reported as your (and/or your parent’s) taxable income. This number comes from your (and/or your parent’s) adjusted gross income (AGI) as found on a federal tax return. The untaxable income you entered on FAFSA worksheet B is not included in your AGI. It is my understanding that FAFSA is programmed to look first at your (and/or parent’s) AGI. Based on the information you entered, it appears the calculator you used concluded that you would qualify for the automatic zero EFC and/or the simplified needs test. I believe that both the automatic zero EFC and the simplified needs test are triggered solely from your (and/or your parent’s) AGI, not from your (and/or your parent’s) total income. Assuming you met the automatic zero EFC and/or the simplified needs test, the calculator you used ignored your worksheet B unearned income, and spit out an EFC of 0. See: www.finaid.org/military/fafsa.phtml. (read section about combat pay)

In other words, FAFSA appears to be programmed to look first at your (and/or parent’s) AGI. If anyone meets the automatic zero EFC or the simplified needs test after looking at your (and/or parents) AGI, FAFSA is apparently programmed to ignore other untaxable income and/or assets. Congratulations on your EFC being 0 and your service to your country. You should qualify for lots of federal aid, not necessarily institutional aid however.

Some final points of clarification: as calculated by FAFSA, an EFC is a sum of a percentage of four factors-parents income, student’s income, parents assets, and students assets.

There are two exceptions to the FAFSA calculation (the automatic zero EFC, and the simplified needs test). First, when dealing with a dependent student, if the parent’s AGI is under 50K, and the parents file a short federal tax return (1040EZ/1040A) or don’t file, then two of the factors (parents assets, students assets) will be excluded from the calculation. This is called the simplified needs test. Secondly, again for a dependent student, if the parents file a short federal tax form (or don’t file) and the parent’s AGI is under 20K (for school year 2006/07), FAFSA will automatically set the EFC to 0 (the automatic zero).

However, since you are a veteran, you are probably being treated as an independent student, which means that your parent’s income and assets were excluded from the FAFSA calculation (this is good for you). The AGI you apparently entered for yourself qualified you for simplified means test, which took your assets out of the calculation. I don’t believe there is an automatic zero for independent students with no dependents other than a spouse. The calculator you used focused in on the number you entered as your taxable income/AGI. Since that number was apparently very low, you received an EFC of 0. If at all possible, if you file a tax return for 2006, file a short form (1040A/1040 EZ), or if you don’t have to file, don’t.

Also, I saw on another thread you mentioned that you were living with your fiancée. If you get married, your husband’s taxable income will get included in the FAFSA formula thereby increasing your EFC and lowering your aid. As long as the school is treating you as an independent, it may pay from a financial aid standpoint to continue to live together and not get married. Good luck.