<p>This is an astonishing loophole: the difference in my EFC WITH the state refund of 75$ is over $7000.</p>
<p>Yes, if I had itemized deductions in 2007, then my EFC would have been $7000, not $0. All because of having to claim the $75 refund from state taxes.</p>
<p>Whoa.</p>
<p>Yup. Killer isn't it. That happened to us the 2007-2008 FAFSA. Not as big a difference but my daughter certainly lost quite a bit in aid because of a little bitty refund. </p>
<p>I don't know if I would call it a loophole. Or maybe a sort of backwards loophole (or a noose?). You meet all the income criteria for a certain benefit but because of having to file one type of return rather than another - with no difference in income - you don't qualify for that benefit.</p>
<p>What does it mean when my FM=753 and IM= 50?</p>
<p>If you are using a tax program or a professional tax preparer, your tax return will most likely be submitted using the 1040 form, not the 1040A or 1040EZ. In some circumstances one cannot choose which tax form is used...its all based on what forms they have pre-programmed into their software system. If their pre-programming is the only reason you filed a 1040, then you can still answer that you were qualified to file the 1040A or 1040EZ. I have always filed the 1040 form, because of the software I choose to use (no other options are available)...but I meet all the criteria to file the 1040A. When I worked at one of the tax preparation agencies, I consulted with FAFSA about this, as our software only allowed 1040 and 1040EZ. They assured me at that time that it was acceptable as long as the criteria was met. So don't sweat it if your software places everything on the 1040 form....just look at the criteria to make sure you could have used the 1040A.</p>
<p>That is my understanding, as well. The test is if you "could." Remember, though, that itemizing makes it a "can't" (claiming the EIC or additional child tax credit, though, is not *itemizing"). Business income/loss also makes it a "can't."</p>
<p>Thankyouall, you are one of the lucky ones ... your EFC is actually lower using IM than it is with FM. Folks here usually find the opposite to be true! I will caution, though, that IM methodology is not as easy to predict as FM. FM is the federal method, computed using the info provided on the FAFSA. IM is computed from the info provided on the CSS Profile ... and not all schools use it the same way. It's hard to know what your EFC would actually be at a Profile school. In any case, your EFC is quite low. Schools that promise to meet need would most likely offer you a pretty good aid package. OTOH, schools that do not promise to meet need may not offer you as much as you would need to comfortably afford a particular school ... that "gap" between cost of attendance and your EFC is what gets filled with aid ... and not all aid packages are created equal (it depends on the school).</p>
<p>True Nikkil. Our preparer only uses 1040 forms because of the software system so what you are saying on being sure you meet the "criteria" is right on. If you are verified the first thing they want to know is why the 1040 was filed if you were eligible for the 1040A or EZ.</p>
<p>swimcat is correct! I just used TurboTax and it printed a 1040A for me. It did not ask if I wanted to do this, it just did. It DID ask about the state refund and whether I had itemized in 2007, however, so the software is aware of the ruling we have been discussing.</p>
<p>Thanks again for all of the info.</p>
<p>Swimcat and Linda.</p>
<p>So are you saying that even though you itemized in 2007, and received a state refund in 2007 that the TurboTax program allowed you to file a 1040A for 2008? If this is the case then couldn't we answer "yes" to the question about being eligible to file a 1040A? I ended up filing the 1040 and answering "no" to the above question. I'm so confused since the instructions state that if you itemized in 2007 then you can't file a 1040A this year. </p>
<p>My FAFSA came back verified so at least I feel like I followed the directions but it would be good to get this information correct, especially since it does make a difference in teh EFC. When I called FAFSA they just quoted from their instructions. I don't think they actually know what's going on with this!</p>
<p>No we are not saying that at all. Linda did not itemize. Turbotax asked her about the state refund and as she had not itemized in 2007 she did not have to report it on her 2008 federal return.</p>
<p>Just to clarify. You received the State refund for 2007 overpayment in 2008 right? If you actually received it it 2007 then it would have been reported in the 2007 tax return (if required).</p>
<p>The relevant IRS publication is linked in post #18.</p>
<p>Assuming you received the refund in 2008, when you did your 2008 tax return did you have to report the refund on the federal return? If you had to report it (the rules are quite complex) then the only return you can report it on is the 1040 making you ineligible to file a 1040A or 1040ez.</p>
<p>Yes, we received a refund in 2007 and did report it on the 2008 return this year. We also filed Schedule A (1040) to itemize in 2007. However from what I can figure out from the instructions, it's not necessary the refund that is causing the confusion as to what form to file (correct me if I'm wrong here), I think it is the fact that we itemized in 2007. We did not itemize this year so I think that next year we will be eligible to file the A. </p>
<p>Haven't done the state taxes yet so don't know about a refund this year, don't think we will be getting one as we changed our state witholdings. We actually will probably have to pay the state this year. Who would have thought that would be a good thing???</p>
<p>Thanks for your clarification and help!</p>
<p>It isn't the itemizing that prevents you from saying yes in this case. If you itemized the prior year and took the state and local income tax deduction on the Schedule A and received a state refund, the 1040 is the only form you can file. Form 1040A does not have a place to enter the now taxable state refund.</p>
<p>Example: In 2007 you itemized and claimed the state income taxes withheld as a deduction on your Schedule A. You then received a refund from the state because you overpaid your state taxes. When you file your 2008 tax return you have to claim the refund as income on Form 1040.</p>
<p>HOWEVER...there is a way to get out of this cycle. On your 2008 return...don't itemize. Then in 2009 you will not have to report the state tax as income and (unless you have other circumstances) you won't have to file the 1040 form again.</p>
<p>The only time state taxes are taxable on your federal income tax return is if you claim the deduction on the Schedule A of the prior year's tax return. If you receive a state refund but either did not itemize in the prior year or if you elected to take the state and local sales tax deduction instead of the income tax deduction, the refund is not taxable.</p>
<p>(See IRS Publication 17, page 22) <a href="http://www.irs.gov/pub/irs-pdf/i1040.pdf%5B/url%5D">http://www.irs.gov/pub/irs-pdf/i1040.pdf</a></p>
<p>Thank you, that makes perfect sense. And no, we did not itemize this year!</p>
<p>OK - I am not a tax accountant but will try and explain it to the best of my understanding. </p>
<p>Itemizing on it's own in the previous tax year would not mean you have to file a 1040 in 2008. Getting a State tax refund on it's own would not mean you have to file a 1040 in 2008. It is a combination of the State tax refund and the itemizing in 2007 that causes the problem. By itemizing your state taxes paid in your 2007 return you may have gained a federal tax benefit (whether you actually did or not is complex and something your tax preparer or software would figure out). If you gained any federal tax benefit by itemizing the state taxes you overpaid for 2007 then the federal govt. wants to recover that underpayment of federal taxes. For them to recover the tax benefit means you have to report the refund as income on your 2008 federal return. The only place you can do this is a 1040 so, if you are required to report it, you become ineligible to file a 1040A..</p>
<p>If you got a state tax refund in 2008 for 2007 state taxes but did *not *itemize on your federal return then the refund would not be reportable income as you did not gain any federal tax benef.</p>
<p>If you itemized but did not get a state tax refund then you are not barred from filing a 1040a unless ther is some other reason you cannot file a 1040a.</p>
<p>To try and put it in numerical terms. Say you paid $2000 in state taxes in 2007. When you itemized on your federal return you listed $2000 as an itemized expense. This reduced your taxable income for federal tax purposes by $2000. If, when you did your state return, your state taxes should have only been $1750 then you would get a $250 refund from your state. This $250 becomes reportable income on your 2008 federal return because you reduced your taxable income by $2000 when in fact the expense turned out to be only $1750. The feds want you to pay taxes on that extra $250 that was taken off your 2007 income. That $250 must be reported on a 1040. If you had not itemized the $2000 would not have reduced your 2007 income so you would have gained no tax benefit so any state refund would not be reportable income. If you had itemized but your State taxes turned out to be the $2000 you reported you would not have reduced your income by more than you should have so it would not affect your 2008 return.</p>
<p>It is actually more complex than that as there is an allowance in the standard deduction for state taxes so there is a whole 'was your itemized state tax more or less than the allowance in the standardized deduction' computation. That is something your tax preparer or software would calculate based on the information you provide. If it comes back that you have to report any part of the refund - even $1 - on your 2008 return then you have to report it on a 1040.</p>