1040 or 1040A - Help!

Paying for College
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<p>We are staring at FAFSA and trying to figure out what it is we need to do regard taxes to maximize financial aid. HELP! </p>

<p>It SEEMS that if our adjusted gross income is $50,000, we may get very little aid, but if it is $49,999, we may get a lot of aid. FAFSA asks if we are "eligible" to file the 1040A. It seems the answer is Yes, based on income, but "eligible" only means we can if we want to. I would prefer to file a 1040 because we still have deductions that well exceed the standard deduction. Are we being told, obliquely, that if we itemize deductions, we can forget about the amount of aid otherwise given to those with adjusted gross incomes below $50,000? </p>

<p>If we file the 1040A and thereby minimize our deductions, we lose a substantial refund. But how can we possibly know we are going to make up for this loss when the aid package (specifically the cash grant) comes through? This process seems to require a leap of faith, but faith is for church, not for college. How does this thing actually work?</p>

<p>Dad 23</p>

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<p>If you itemize you are not eligible to file a 1040A. </p>

<p>The question is to see if you are eligible for the simplified needs test. Under simplified needs your assets are ignored in the EFC calculation.</p>

<p>The best thing is to play with the numbers to see which would benefit you the most - the simplified needs or the tax deduction. To qualify for the Pell grant your EFC must be 4041 or below. Qualifying for the Pell may qualify the student for other grants such as the Academic Competitiveness grant or smart grant. For instance, if we had to choose between losing $1000 tax refund money or qualifying for the minimum Pell of $850 which would in turn qualify her for the 2nd year ACG of $1300 then we would choose the latter. If the tax refund would exceed the possible gains we would choose that.</p>

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<p>Swimcats...I think the OP is trying to decide whether to itemize or not. If she does NOT itemize, it sounds like she CAN file a 1040 A. However, it also sounds like she has a better tax advantage by itemizing and therefore will be completing the 1040 long form. </p>

<p>The question of the FAFSA is "if you filed a 1040, were you eligible to file a 1040 Ez or 1040A?". </p>

<p>We filed DD's taxes and by mistake filed a long form 1040 (oops...I must have clicked the wrong button). When I got to that question on the FAFSA, I answered YES...because she COULD have filed a 1040EZ (and truthfully should have...very little income and no withholding...shouldn't have bothered filing at all).</p>

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<p>You may find this helpful - from the how to answer the FAFSA questions site</p>

<p>
[quote]
34. Eligible to file a 1040A or 1040EZ. If you (and your spouse) are eligible to file a 1040A or 1040EZ for 2007, indicate your eligibility to file one of these forms (even if you file a 2007 IRS Form 1040). For instance, tax preparers often file a Form 1040 or an electronic 1040 on behalf of a tax filer, even though that person's income and tax filing circumstances would allow him or her to file a 1040A or 1040EZ.</p>

<p>In general, you are eligible to file a 1040A or 1040EZ if you make less than $100,000, do not itemize deductions, do not receive income from your own business or farm and do not receive alimony. You are not eligible to file a 1040A or a 1040EZ form if you itemize deductions, are self-employed, receive alimony or are required to file Schedule D for capital gains. If you filed a 1040 only to claim Hope or Lifetime Learning credits and you would have otherwise been eligible to file a 1040A or 1040EZ, you should answer "Yes" to this question. If you filed a 1040 and were not required to file a tax return, you should answer “Yes” to this question.

[/quote]
</p>

<p>That is kind of strange - my son claimed the hope credit and I'm pretty sure he filed a 1040 A.</p>

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<p>Bomber, please read this article:
FinAid</a> | FinAid for Educators and FAAs | Simplified Needs Test Chart</p>

<p>Also, keep in mind that you can file an amended return later on. That is, you could file the 1040A with the standard deduction, and then if you do not get the financial aid benefit you hope for, you can file the amended 1040 to get your refund. You will then also need to correct the FAFSA so that it reflects accurate information -- but I assume you will have done the math by that point to figure out whether you save more by cutting your tax liability.</p>

<p>I'm also wondering how much you have in the way of assets -- unless you have a LOT then the simplified needs test really isn't that much of a help. Try playing around with the FAFSA calculators to see how much of a difference it actually makes. For example, if you have $60,000 in savings, and a $49K AGI, 2-parent household with the older parent being 50 years old, you would have a $49K asset protection allowance -- which would result in this calculation:</p>

<p>Total Assets 60000
Asset Protection Allowance 49000</p>

<p>Discretionary Net Worth 11000</p>

<p>Parents' Contribution from Assets
(12% of DNW) 1320</p>

<p>Parents' Available Income 25437
Parents' Contribution from Assets 1320</p>

<p>Adjusted Available Income 26757</p>

<p>Estimated Parents' Contribution 7102
Adjusted for Number in College 7102</p>

<p>In the above example, if the family qualified for the simplified needs test, it would reduce their EFC to $6574 -- only $528 less than with the full assets considered. </p>

<p>Keep in mind that whereas the reward for tax deductions from IRS is guaranteed and easily determined when you do your return, the reward for increased financial aid eligibility is far more speculative. Most colleges do not guarantee to meet full need, and most that do promise to meet full need use "institutional methodology" to figure out the aid, meaning that they probably consider all assets in computing aid in any case. In general, you do better to save as much as possible with the IRS -- mathematically it simply tends to work out in your favor.</p>

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<p>We can't file the 1040A because we own a business. We still qualified for the Simplified Needs Tests as our children are eligible for reduced lunch at their school.</p>

<p>I don't know if it made a huge difference in our EFC, but it made filling out the online FAFSA a lot easier. After we inputed our income, we were able to skip the sections on parents' assets and student's income/assets.</p>

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<p>Dear everybody, first of all, thank you so much for responding.</p>

<p>Swimcatsmom: I took the liberty of copying your post from another thread in which you write:
The 1040a requirement is weird and a bit annoying when your income is the same but some little thing makes you unable to do a 1040a - last year we had to do a 1040 because we had a very small state tax refund in 2006 and had itemised deductions in 2005 - that little refund cost us a lot in financial aid!!</p>

<p>This seems to be exactly our dilemma: we too received a (small) tax rebate from our state in 2006.
According to the Simplified Needs Test Chart (thanks Calmom) it is my understanding that because this money needs to be declared on line 10 of the 1040 form, we are now REQUIRED to file a 1040.</p>

<p>Can this really be true?</p>

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<p>Any state income tax refund is declared on line 10 of the Form 1040 to the extent it provided benefit as an itemized deduction in the prior year. If one did not itemize in the prior year (and therefore include state taxes as an itemized deduction expense), then the state refund is not included as income on the 1040.</p>

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<p>bomber-
I could not qualify for the simplified thing this year because of the state income tax refund. It has to go on form 1040. So this year, when I saw that we would be getting a state income tax refund of $51, I chose to donate it to two of the the state funded charities that you can contribute your refund to. I don't know if we will actually end up with more than $51 in extra financial aid for next year, but I think we will, and it will probably save $51 worth of time and aggravation in filling out the forms.</p>

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<p>Bomber - unfortunately it is true. As sryr said - the State tax refund causes you to have to file a 1040 if you itemized deductions in the previous tax year. If you did not itemize deductions you are ok. </p>

<p>Never thought of donating the refund! Too late now. Well I guess it was already too late by the time I knew the difference it would make.</p>

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<p>orangepurple: If you didn't itemize your deductions in one year, you don't have to claim the state refund back on your federal return the next year. Since that's the only thing that stopped you from filing a 1040A, I'm guessing you don't itemize.</p>

<p>Swimcatsmom: never too late. Or at least not for 3 years. You can always amend. But again, if that's the only thing stopping you from filing a 1040A, it's not taxable anyway.</p>

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<p>We did itemize in the year we got the State tax refund. Which meant the State refund had to be shown on the next years federal return which meant we had to use a 1040 even though we were not itemizing that year.</p>

<p>ie - tax year 2005 we itemized on our federal return. When we submittted our returns in 2006 for 2005 we had overpaid our State taxes so received a refund in 2006 for the 2005 overpayment. That refund had to be shown on our 2006 federal return which can only be done on a 1040 not a 1040a or 1040ez. Does not matter if you itemize or not in the year you physically receive the refund but whether you itemized in the tax year that generated the refund. Believe me we tried to figure out a way to use a 1040a but there was not one.</p>

<p>It was Feb of 2007 that I realized the refund we got in 2006 from 2005 could make a difference. I don't know if we could have gone back and changed out State tax refund and donated the refund like orangepurple did. Never crossed my mind. Definitely to late now for 2007-2008 financial aid purposes but we are all set for 2008-2009.</p>

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<p>I now the see the picture more clearly, thank you, and it is not pretty. It seems that the sheer accident of overpaying one's state taxes in 2006, generating a refund sent in 2007, has far-reaching impact on eligibility as to what form must be used and, therefore, as to what kind of financial aid one is offered. This is insane, really. We are asked to take a figure that represents income only in the sense of having our having overpaid and report it on 1040. My concern now is this: from what I read, reporting on 1040 for 2007, no matter what the reason, can or will seriously reduce financial aid. Fairness would seem to dictate apportioning aid on a sliding scale, taking all income and assets into account. But the way it works, you must file 1040 if you got a state refund (you can't ignore it, as it is income) and if this puts you over a certain amount -- 50K, say -- you can expect a precipitous drop in offered aid. There would seem to be a hard line rather than a scale. This is Problem 1. Problem two is: how do you compare potential aid (an unknown amount based on the school's proprietary methodology) vs. the amount of federal taxes saved (which can be known absolutely)? Problem 3: Why are we being penalized for having a mortgage?! A house is an asset, even in these times, but it is, in month-to-month terms, a cost -- the cost of "renting" money from the bank -- and, as many people are now learning the hard way, a cost that can rise with the market, leaving you with an "asset" you can't liquidate except at a loss over last year, if you can sell it at all. I don't want to sell my home! Why should that mean we are unworthy of aid?</p>

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<p>I now the see the picture more clearly, thank you, and it is not pretty. It seems that the sheer accident of overpaying one's state taxes in 2006, generating a refund sent in 2007, has far-reaching impact on eligibility as to what form must be used and, therefore, as to what kind of financial aid one is offered. This is insane, really. </p>

<p>We are asked to take a figure that represents income only in the sense of our having overpaid and report it on 1040. My concern now is this: from what I read, reporting on 1040 for 2007, no matter what the reason, can or will seriously reduce financial aid. Fairness would seem to dictate apportioning aid on a sliding scale, taking all income and assets into account. But the way it works, you must file 1040 if you got a state refund (you can't ignore it, as it is income) and if this puts you over a certain amount -- 50K, say -- you can expect a precipitous drop in offered aid. There would seem to be a hard line rather than a scale. This is Problem 1. </p>

<p>Problem two is: how do you compare potential aid (an unknown amount based on the school's proprietary methodology) vs. the amount of federal taxes saved (which can be known absolutely)? Problem 3: Why are we being penalized for having a mortgage?! A house is an asset, even in these times, but it is, in month-to-month terms, a cost -- the cost of "renting" money from the bank -- and, as many people are now learning the hard way, a cost that can rise with the market, leaving you with an "asset" you can't liquidate except at a loss over last year, if you can sell it at all. I don't want to sell my home! Why should that mean we are unworthy of aid?</p>

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<p>Well the whole simplified needs test (income under $50,000 and filing 1040a etc etc) only makes a difference if you have unprotected assets (ie not house or IRAs etc) that substantially exceed the protected asset allowance. All simplified needs does is exclude those assets from the calculation. I would suspect that the majority of people with income below $50,000 do not have assets, other than a home which is not counted, that exceed the protected asset allowance. Even the assets over the protected allowance are assessed at @5.6% so would have to be fairly substantial to have an enormous effect on the EFC.</p>

<p>Dad23 - how are you penalized for having a mortgage? A house is not reported on FAFSA.</p>

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<p>Bumping up this old thread to ask my question.</p>

<p>We have had a dramatic change in income this last year which I hope to never repeat. Here are the facts:</p>

<p>Our EFC is 979</p>

<p>Our Sar said we my qualify for a Pell Grant of up to $4,600.</p>

<p>On the FAFSA itself I checked “unsure” when it asked if I was eligible to file a 1040A or EZ.</p>

<p>It seems we will meet many qualifications of the pell grant this year except for the one regarding filing a 1040. We do not itemize.</p>

<p>We are filing a 1040 due to carryover investment losses. We file a schedule D which lists these losses every year as we can only deduct $3,000 a year.</p>

<p>Will this disqualify us?</p>

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<p>It’s not a requirement for Pell.</p>

<p>The only thing that the simplified formula does is ignore assets. You have to have a lot of assets for it to make a difference. There have been widows with life insurance payouts that need to last them for the rest of their lives who find this a problem, and there are families with rental properties that are losing money that can find this a problem - others, too. But MOST people who earn less than $50k do not have assets significant enough to pose a problem.</p>

<p>Auto 0 is another story - if your AGI is low enough for auto 0, having to file a 1040 can be a problem. </p>

<p>For both formulas, there are always the alternative qualifications: Dislocated worker or someone in the family has received federal means-tested benefits during the previous 24 months.</p>

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<p>So a 1040 with a schedule D is not an automatic dis-qualifier for the Pell Grant? I’m so happy to hear this!</p>

<p>We do have assets, mutual funds, savings, etc…but all of that was listed on the FAFSA and it still said we may qualify for the Pell so the only thing I was worried about was the 1040 and the schedule D.</p>

<p>I guess it just means they can’t use that simplified formula on us but have to evaluate fully.</p>

<p>The paper also said we’ve been selected for verification and the school might ask us for documentation. My plan is to wait until a few weeks after we file and use the income retrieval tool so hopefully we won’t need to submit much documentation if any.</p>

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<p>Definitely wait. That’s the best way.</p>