@privateID After contributing, we saved $1375 in federal taxes and received $500 less in grant aid from the college. Federal work-study also was reduced $270.
So, we didn’t have all of the tax savings gobbled up by reduced aid, but it was a significant amount.
I believe I’ve made the decision to stop contributing to my traditional 401K (after the match point). I will either contribute to a ROTH 401K or not contribute anything else to my 401K. I do also max out 2 ROTH IRAs.
Here is an admittedly strange idea if you only have one in college or two at the same time (would be over too many years otherwise). Obviously something that would have to be run by your accountant. This is not something I would recommend nor have I researched it nor would ever do but it is an interesting THEORETICAL idea. Feel free to poke holes in it.
Pay more taxes, equal to what you would have paid without the traditional 401k, take fewer exemptions! You only owe whatever you owe, any excess will go to next year if you say you do not want a refund. Seriously, the NPC runs your EFC without asking what you contribute in taxes. However both FAFSA and the Profile ask what you actually paid in taxes (Not sure but I seem to recall being annoyed by this as we tend to be rollers so had not paid much in reference year). Assuming you are relatively comfortable (but not so comfortable that you do not qualify for need), what about paying more in taxes in the years you use as your reference years and doing a Traditional 401k (assuming that is something you want anyway)? Then deferring the excess forward instead of taking a refund. When you no longer need FA, ask for a refund on that year’s taxes of all the excess money being held. The other advantage is since your future tax refund is not a listed asset (do you have to report it?), this money being held by the government will reduce your assets (is there a place to even report this?)
I have friends who are self employed and their accountant makes them roll over their refunds from year to year. Some years they overpaid by $$$$ and have a huge credit, other years they end up having to send in a payment with their estimates.
The down side is you cannot invest the money and the interest you would get on it is negligible so it may not be worth it and that assumes you are comfortable on principle with this concept, some people hate the idea of someone else holding their money and not getting a refund. If you needed the money in an emergency it would take at least 10 weeks or so to get it back.
By “actually paid,” do you mean the amount of W-2 and 1099 withholding + quarterly estimated payments + amount paid with return + any refund rolled over from the previous year? Because if that’s what you mean, your statement is not correct. FAFSA and Profile ask what your tax liability was for the year, and if you have overpaid (meaning a refund is due) your tax liability will be different than your tax payments.
Yes then it would not work. It has been awhile since I filled out the form, I knew it was too good to be true! I was thinking of the wrong line.
One question, why are self employment SE taxes not included when calculating tax liability for FAFSA?
SE tax is not income tax.
Yet it is listed as part of your total tax? Is this just another way of saying FICA/Medicare or is it more than that? Thank you
On FAFSA FICA taxes are calculated separately for each parent and added to the allowance in addition to the income tax. Profile schools should do something similar. Both FAFSA and Profile ask about income from work for each parent separately for this very purpose.
@CCDD14 - Yes, I agree with that. In fact, I have read that the directions for that question on the Profile are wrong. If you do what they tell, it does not include your 401K contributions. However, FICA is taken out of 401K contributions. So the one source indicated that you should add your 401K contributions back in. he said many experts agree on this point. Here are the directions for one of the parents:
“Estimate the income parent 2 earned
or expects to earn from work in 2015
using his or her 2015 W2
form(s) if
he or she has received them; your
parent’s 2014 IRS Form 1040, lines
7, 12, and 18 and IRS Schedule K1
(Form 1065), Box 14 (Code A) (if
lines 12 or 18 are negative, treat
them as zero); and pay stubs and
other income documentation for
2015. If your parents filed a joint
return, use only parent 2’s portion of
lines 7, 12, and 18 and Box 14 to
estimate.”
^ Please explain or give an example.
Also, with self employed, what about that you are paying the entire FICA instead of just the employee portion, is that factored in as well someplace?
Retirement plan contributions, including 401(k) contributions, are asked about in other Profile questions. I don’t see why what ever formula a Profile school uses couldn’t figure the amount of FICA paid on those contributions.
@BelknapPoint Good point. I really don’t know. Just saying what I read in a book about adding the 401K contribution back in.
401k contributions are not listed on the tax return, but they are listed on W2. On FAFSA you also have to remember to list the 401k contributions in untaxed income, question 94a I think.
Don’t you get a credit for half of self-employment tax on your tax return?
The 1/2 SE tax is not a credit, it’s a deduction for AGI.
Yes it is one of the adjustments to income on the first page. So maybe that is where it is picked up on FAFSA since that is one question that is asked.