Yes, 401k contributions get reported on the FAFSA, as untaxed income, which it is, it is not taxed by federal tax.
But it can’t become part of your AGI because it is not taxed and not listed on the tax return.
You can’t just make up your own AGI, it gets brought over from tax return to the FAFSA.
I meant if you don’t contribute to a 401k then your AGI will be higher because that income will now be included in gross federal income, and be taxed. You choose if that’s better or not. I would vote it’s not because you might also miss out on free employer contributions. And any income you don’t have to pay taxes on is good, right?
It’s certainly a fair point to say follow the directions. However, why not try to understand why a question is being asked? Many articles are written to describe the methodology used - 5.65% parent assets, 20% kids assets, etc. With this information, one can plan better. There is a question on the FAFSA that asks for AGI. There is no ambiguity as to how that is used. Then there’s another question about each parent’s income. Why do they ask this question? One possible reason would be to compute fica/medicaid paid. If that’s the case, the instructions are indeed wrong to exclude 401K earnings. Maybe there’s another reason other than fica/medicaid and consequently the answer to the question should exclude 401K income. I’m not an expert. Just trying to learn. Do you know another reason for the question?
The FAFSA has very specific lines for specific items. There IS a place for the contributions to 401k accounts to be included. That’s where it belonged.
There a question about what each parent had in earned income. Those amounts go on those lines. The reason really doesn’t matter.
The FAFSA has very specific place s for ALL of these things to be.
The OP (oops) forgot to put her 401k contributions ON her older daughter’s FAFSA last year…period.
^ Sure, as far as the OP is concerned, it sounds like that was the error. And I apologize for getting off track. I just saw a comment by the OP from the book and was trying to clarify. As to “The reason really doesn’t matter”, I’m sorry but I disagree. I want to understand how the process works. Apparently the OP does as well, that’s why they read that book. To understand the process, it helps to understand the questions. Why would they ask the total combined income and then ask the individual incomes. There must be a reason and that reason affects EFC. The author of that book believes many people are coming up with a too high EFC because their fica/medicare is being understated. That is my point.
Yes, there is one reason I know of. If you have two parent wage earners the FAFSA formula treats that more favorable than if there is only one.
The DRT brings over AGI and income from working from the tax return, but if you file married jointly there will be one total amount reported just like on the tax return. Then you have to allocate it to parent 1 and parent 2 on the FAFSA fields where it asks for it.
There is an employment expense allowance on the FAFSA.
If both parents work it is 35% of lesser of earned incomes or $4,000 whichever is less I think, and if only one parent works it is zero.
The author of that book OP mentioned made his own interpretation, but the rules are the rules.
Also some people might file married separately and then there needs to be a space to list each parent’s income.
I suggest you read through the EFC formula for more complete understanding of FAFSA.
^ Good points @mommdc. I have read through the formula, but I fully admit I am an amateur. The book mentioned did help understand some of the formulas used. I’ll take your word that what you said is correct. There still is an issue that if that question is being used to compute fica/medicare, then it is being understated if you contribute to a 401K. Again, I am not claiming to know how the FAFSA people are actually using that question, but it does make sense that you would need to know the individual incomes to compute those values. It also makes sense that you would not get penalized for paying fica/medicare (or at least that seems consistent with not being penalized for taxes paid). So, if that’s the case, my question is why wouldn’t you care? Perhaps it’s not a large enough amount.
But what you are forgetting…you are SUPPOSED to list those 401k retirement contributions in a different place. If the applicant does that…it IS considered.
@thumper1 I don’t believe that those 401K retirement contributions are broken up by parent 1 and parent 2 and you would need the breakdown to compute fica/medicare.
“The 2015 Social Security tax rate is 6.2% up to the first $118,500 in taxable wages. The 2015 Medicare tax rate is 1.45% and there is no taxable wage limit.” Pulled that from the web, but assume it’s accurate. So without knowing if one parent made more than $118,500, you can’t compute FICA.
The OP found the answer to her question. Her EFC for each child this year is accurate because she completed the forms correctly. That is what she wanted to know.
The rest of this is not related to,the OPs question…at all.
Unless the school requests copies of W-2s. Many schools do, and it would certainly solve this problem, as gross wages, income tax withholding, FICA withholding and tax deferred retirement contributions are all noted on the W-2, which is issued individually to each wage earner.
But really, the advice given in the book that was referenced is just dumb. Follow the rules as spelled out on the FAFSA. It’s not rocket surgery.
The FAFSA people are Federal Student Aid, the government arm that is charged with interpreting the rules set forth by Congress. FSA’s interpretation is the only interpretation that matters - and financial aid professionals are expected to know and operate within the rules as interpreted by FSA. When I verify a student’s financial aid file, I am required by law to put things where they should be if they were put in the wrong place when the FAFSA was completed. I interpret that to mean that those things should have been put where they were supposed to be put in the first place.
I agree off topic. Again, sorry to the OP about that. On the other hand, this confusion started because of that book, so perhaps not so off topic to fully discuss the question.
@BelknapPoint - Certainly true for some schools but not all schools. As for the advice, I didn’t listen to it this year (my first year doing this), but that doesn’t mean I don’t want to understand.
There are books that suggest a parent write a check for the contents of their checking account and hand it to a friend to cash- then fill out FAFSA. A month later, the friend hands it back. There are books which have all sorts of suggestions of how to “remove” your assets in order to qualify for various entitlement programs, including how to impoverish wealthy elderly people before moving them into a nursing home.
If you contribute to a 401(k), 403(b), or any other pre-tax retirement account, you must add back any contributions in the previous year to your income for FAFSA purposes. This in effect produces a higher FAFSA income than what might be shown on your tax return.
The poster here discovered that FAFSA unfairly penalizes people who invest pre-tax in 401K by not giving them full credit for all FICA taxes paid. This is not the only case when people are “penalized” by FAFSA for their financial/family situation. FAFSA cannot be perfectly fair to everyone. You just have to accept that.
The colleges with the best finaid use tax returns and W2/1099s to calculate aid. Hopefully their secret formulas account for this issue better.