Since the IRS is not including the first $10,200 of unemployment benefits per person as income (for 2020), does anyone have an idea how the colleges will handle that? Will they have us add it back in (like 401k contributions) or might they be generous since it was Covid unemployment?
That’s where it gets even trickier. If you filed before the IRS made this ruling (March 11), then it was included on the tax return, but the IRS will re-calculate your taxes and refund you the taxes you paid on the $10,200.
But…if you waited to file until after the ruling, then you are not supposed to report it on the 1040.
So…likely to be a big mess for financial aid next year.
But if the colleges want to know about it, they will ask that it be added in, similar to other untaxed income. I’m hoping they will say “Covid unemployment…don’t need to add it back in since it’s getting special treatment from the IRS”.
Actually, something similar happened in the late 2000’s. It turned out that the untaxed unemployment had to be reported as income on the FAFSA. That determination was made late, and aid officers had to search for FAFSAs with unemployment and add the amount in. It was a mess! However, the change to prior prior year gives the Department of Education plenty of time to do things right this time around. You won’t be reporting 2020 income until the 2022-23 year, so you’ll get clear instructions on the FAFSA when it comes out in October. I expect that you will probably have to report it as untaxed income … but who knows.
We filed after. Even though it doesn’t count in your adjusted gross income it still shows up on a separated form. I read somewhere last night that it won’t count for the Fafsa next year but not sure how it will work for CSS schools.
We filed before the deadline ruling. Can you tell me about the separate form? Does it have its own form number?
And can you imagine the mess it will be if some FA applications have a 1040 with unemployment reported and higher taxes on the tax owed line, and some don’t? Not to mention the change in child tax credits.
To even add more to the unknowns, it’s not just FAFSA/Profile using AGI. I’ve been looking into scholarships attached to Federal AGI. In NY, the Excelsior Scholarship is triggered off of the AGI. My daughter only qualifies for this scholarship in the 2022/23 school year depending upon how this $10,200 is treated (added back into AGI or not). No idea how to plan/not plan for it.
Impact of American Rescue Plan Change to Tax Treatment of Unemployment Benefits on Student Aid Eligibility for Cycle 2022–23 | Knowledge Center
Here is the published guidance from DOE, 9/30/2021 (this site will not allow me to include link). The guidance is to provide PJ for those filing before 3/11/21 to assure AGI is not potentially overstated. It does not say to assure those filing after 3/11/21 to assure included in untaxed income to ensure income is not understated. It is not included or added back as income.
What it doesn’t say is whether the untaxed unemployment will need to reported as untaxed income. Back in the late 2000’s, financial aid administrators had to update the FAFSA on our end to include the unemployment that was excluded from taxes as untaxed income. We had a whole lot of updates to make, because the Department of Education decided to have that included as untaxed income late in the game. Given the current climate of trying to help those affected by Covid shutdowns, they might not do that this time around.