CSS Profile, K-1's and Untaxed Benefits Related to Retirement Contributions

On the CSS profile questions about parents’ income earned from work, those parents with income from a K-1 are directed to input their income as presented on specific lines of the K-1. The next question asks about ‘untaxed benefits’, such as retirement contributions, child support received, workers’ comp, veteran benefits and other items that they will be adding to your income earned from work.

The issue I am having is K-1’s do not include deductions for retirement plan contributions made on behalf of the partners. Such contributions are deducted directly on the individual’s 1040 (Line 28) which is causing a problem with the math resulting in essentially adding back retirement plan contributions that were not deducted on the K-1 to begin with

To clarify with an example:

DH and DW own a partnership LLC
DH earns $25,000 and contributes $5k to a solo 401(k)
DW earns $25,000 and also contributes $5k to a solo 401(k)
Total income $50,000. Total income after tax-deferred retirement plan contribution $40,000.

Per the CSS profile questions:
Income earned from work (directed to a specific line on the K-1): $50,000
Untaxed benefits added to income $10,000 (retirement plan contributions)
Total income $60,000

Adding back the $10,000 to the K-1 income is not correct because per IRS rules this item is not deducted on the K-1 but are instead deducted directly on the 1040. This results in income that is too high by $10,000. This is in contrast to a W-2, where Box 1 is net of any retirement plan contributions one would make as an employee at work and it would make sense to add them back to derive total income. Had this information come directly from Box 1 of a W-2, the earnings from DH and DW would have been reported as $20k each ($25k - $5k 401(k) contribution) and adding back the $10k of retirement contributions would be appropriate to bring the total income back up to the $50k.

I don’t want to just lower the K-1 reported amount since they specifically asked for that line on the filed K-1 but clearly there is a problem with the math if we add back the untaxed benefits the way they have directed us to for retirement plan contributions since they were never deducted from the K-1 to begin with. Again, there is one box for this ‘untaxed income’ and they are adding the retirement plan contribution along with a number of other untaxed items someone may have that are being added back to income such as workers’ comp. I could leave the untaxed income line blank, however they are specifically asking for contributions made to retirement accounts so I don’t like that option either.

Anyone else have any experience with this? Any advice as to what we should do?

Is there any other earned income from work on the 1040 besides the income from the K-1 entity?

I suspect that ultimately they are NOT adding the $10K retirement contributions to the $50K from the K-1, but rather to whatever your final AGI comes out to be (which probably does take into account the retirement contributions).

But I wouldn’t take my supositions as a definitive answer, I would contact CSS or the Financial Aid office of the college of interest if you need further clarification.

What does your box 12 say on the W-2, is there a code D?

Normally for an employee there is the 401k contribution of the employee and if there is employer matching then the contribution of the employer.

I know for FAFSA you only have to report the employee contribution. Ours is listed in box 12 with code D on the W-2.

The box 1 on W-2 lists gross federal wages, so it does not include pretax retirement contributions.

Could it be since this is a LLC, and you are both in effect employer and employee, that is the reason for the $5,000 to be counted twice?

Was there $5,000 contributed to each of your 401k for the year, or $10,000?

Found this:

https://www.incnow.com/tax-tips/

So maybe the original “income” was $30,000. Then the LLC gets to deduct $5,000 for retirement contribution. So it only reports $25,000. And then you make a $5,000 pretax contribution.

But the $10,000 counts as untaxed income for financial aid forms.
Could that be it?

This is not how partnership taxation works. The OP has accurately described how partnership income is presented on the K-1.

Sorry, I am not familiar with LLCs.

I was trying to find information that might explain the OP’s issue with the 401k contributions seemingly being counted twice.

So what is the solution to OP’s problem?

I have no clue what the right answer is, or how any of the lines are interpreted. All I know is taxes.