Do grants claimed as income on tax return count as income on FAFSA next year?

Paying for College
1

We’re still working on getting our 2019 tax returns submitted and have been stuck on an issue that has been preventing us from submitting them. I promised my husband I’d figure this out so we can get them in – only 3 months later or so than we usually do!

My son is a sophomore in college and during 2019, his grants and scholarships exceeded his tuition and fees. (The school he goes to has very reasonable in-state tuition.) He also used a $3000 distribution from a 529 account owned by my husband and me. I am aware of the strategy of claiming the use of some grant/scholarship money for other expenses (room and board) on his income tax return so that we can then get the full American Opportunity Tax Credit available. He would only need to claim about $1800 of a Pell Grant as income in order for us to maximize the tax credit. (We then give him the money from the tax credit, so my husband and I are not benefiting financially from doing this. Our son pays for his own education, and I’m trying to get him the most money possible.)

My main question is: Will the increase in his income from claiming the grant on his 2019 tax return then affect his future need-based financial aid for the 2021-2022 school year? On the tax return, the 529 distribution and grant count towards his Adjusted Gross Income. So, his income rises. However, on the FAFSA, besides entering in AGI, there are also additional questions that ask specifically about 529 distributions and scholarships claimed as income. I’m not sure then, if that means they disregard that income when determining EFC. Does anyone know???

If his 2019 income was well below the protected income amount for students, it wouldn’t matter. However, he worked hard last summer and made over $7000, so the additional income will count towards his EFC. I want to be sure that the extra few hundred dollars he would get from us claiming the full AOTC wouldn’t then possibly result in him possibly exceeding the income limit for grants that he has has received the past couple years.

So, if anyone knows whether that scholarship/grant income actually counts against students because it’s counted as income for need-based aid on the future FAFSA, I would really appreciate it! I thought of having him asking his college’s financial aid office but honestly, they’ve been a bit clueless about things in the past so I sort of doubt they would even know.

Thanks!

2

IIRC, student financial aid is not considered income at all in terms of financial aid applications.

I believe there is a question on the FAFSA that asks if any if this “income” was from financial aid…or something like that.

But I could be wrong so I’m tagging some people who might have the answer.

@BelknapPoint @kelsmom

3

Generally, no. Taxable college grant and scholarship aid reported to the IRS as income is reported on FAFSA question 43.d, and it is then subtracted from the student’s other income before the FAFSA EFC is determined.

The only reason for your son to report a 529 distribution on his tax return is if he or the school received a non-qualified distribution from the 529, and then only the earnings portion of the non-qualified distribution is considered taxable (and also subject to a 10% penalty, unless an exception applies). Is this why your son is including 529 money in his tax return AGI?

The only place on FAFSA that your son would specifically report 529 money that was given to him or used for his benefit would be question 44.i, and only in a situation where the 529 money came from an account that was not owned by either your son or a parent who is required to report financial information on FAFSA.

Edited to add: when asking about FAFSA questions, it really helps us if you identify which specific questions you are asking about.