FAFSA changes made by college: AGI and Other Untaxed Income and Benefits

Paying for College
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<p>My son and I met with a college financial aid adviser yesterday and here’s an update. (Get a glass of your favorite beverage before you read this.):</p>

<p>FINANCIAL AID - TAXABLE OR NOT? (LINE 39 OF FAFSA - 2013 INCOME EARNED FROM WORK)
Last year my son received a renewable full-tuition scholarship that will pay all 4 years of tuition expenses as long as he keeps his grades up. He also received a Pell Grant, and an “Academic Grant” from the university that is both academic and need-based, and is renewable based on grades and financial need. Although it’s called an academic grant, the university applied the money they awarded towards his room and board.</p>

<p>Everything I’ve read in the tax code indicates that only scholarship and grant money used for tuition and course-related expenses like fees, books (under narrow circumstances), supplies, equipment etc. is tax-free. IRS materials very clearly state that grant money used for room and board is considered to be taxable. IRS Publication 970 </p>

<p><a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf”>http://www.irs.gov/pub/irs-pdf/p970.pdf&lt;/a&gt;&lt;/p&gt;

<p>provides a worksheet on page 6 of their PDF file that can be used to determine the taxable part of the financial aid that was received. Although the worksheet is called “Taxable Scholarship and Fellowship Income”, at the bottom of the page the publication states that Pell Grants and other need-based grants are treated as scholarships for tax purposes. It also says on the bottom of the page that the taxable scholarship and grant money received should be entered on Line 7 of Form 1040 (wages, salaries, tips, etc.) and if there’s no W-2 form, that the letters “SCH” plus the taxable dollar amount of the financial aid should be entered on the dotted line next to Line 7, which we did for my son’s taxes.</p>

<p>When this carries over from the 1040 form to FAFSA via the IRS Data Retrieval Tool, the amount from Line 7 of the 1040 gets dumped into Line 39 of FAFSA, “2013 Student’s Income Earned from Work”. I realize how misleading that sounds, but it’s “correct” according to all of the directions.</p>

<p>The financial aid adviser along with her supervisor swore up and down that none of the financial aid my son received is taxable, and should not have been reported on his tax return. The adviser pulled up something on her computer and quoted some line that seemed to indicate that room and board are NOT taxable. However, when I got home and read IRS Publication 970, I began to think that she was reading from a section that talked about a “qualified tuition program”, which is a QTP or a 529 plan. Apparently, money drawn from a QTP for room and board is not taxable, but that does not apply to us.</p>

<p>I did not get a sense from either the adviser or the supervisor that they have spoken to any other parents or students about these issues, and they did not seem to know what I was talking about when I told them about Line 7 of IRS Form 1040 referenced above and how we wrote in the letters “SCH” plus the amount of my son’s taxable grant money.</p>

<p>LINE 44d OF FAFSA - STUDENT’S GRANT AND SCHOLARSHIP AID REPORTED IN AGI
We originally reported what we considered to be the taxable portion of my son’s grant money in this line, but the college changed this amount to $0.00 simply because they felt that this money was not taxable and shouldn’t be reported in Adjusted Gross Income. I don’t think the college will change this until I can convince them otherwise.</p>

<p>FAFSA LINE 94i - PARENTS’ OTHER UNTAXED INCOME OR BENEFITS
The college changed this line in FAFSA based on information we provided via their Parent’s Expense and Income verification form that we filled out and provided to them…(We paid for a considerable amount of our expenses from our savings account last year but did not report it as “income” on either the FAFSA form or the college verification form because, in most cases, money sitting around in savings accounts is not considered “income”.) The adviser confirmed that they took the amount of our expenses that was not covered by our income, and dumped it into line 94i of the FAFSA form as Parents’ Other Untaxed Income or Benefits. The problem was, based on how the form was designed, we had to double-count a considerable amount of our expenses because “credit cards” was listed as an expense category and included in the total monthly expenses. As I described in a previous post, for example, when we pay for gas with a credit card, it’s not like we pay at the pump and then pay a second time at the end of the month when the credit card comes due. So therefore, the amount the college reported in FAFSA Line 94i was too high.</p>

<p>Even though we explained this in the “comments” section of the form and told them what we thought our true monthly expenses were (which we did based on instructions the financial aid office gave us earlier), the adviser told me to redo the expense form and only put in credit card interest we might have paid during the year in the “credit card” category. Presumable they’ll update line 94i of FAFSA after we provide them with the revised form.</p>

<p>Although I strongly object to calling savings “income” and having the college put it under the “Other Untaxed Income” category in FAFSA, I don’t think I’ll fight this since they actually did the same thing last year (which I didn’t catch until now) and it didn’t negatively affect my son’s financial aid package…</p>

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<p>Thanks to everyone who gave me advice in their comments. I spent a lot of time typing up this update but I’m afraid readers will still find this rather hard to follow. I’ll give a virtual world gold star to anyone who’s patient enough to read this update.</p>

<p>What I plan on doing is revising the parent expense/income verification sheet per the adviser’s advice, and perhaps humor the college by calling the IRS and seeing what they have to say about taxable and non-taxable grant money. If the IRS confirms what I think is true about my son’s taxable grant money, my next step is to send the financial aid department an extremely detailed appeal letter along with relevant portions of the IRS tax code to support my position.</p>

<p>Oh, and by all means, if I’m totally wrong about this and all of his grant money is tax free, please let me know!</p>

<p>(Finally, the line down below is from an earlier draft. I can’t delete it because I can’t find it when I’m in the edit mode.)</p>

<p>She told me to call the IRS and have them explain to me how his 1040 should be filled out</p>

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<p>This is just off the cuff advice: The IRS isn’t going to care where the money came from to pay the tuition/fees, books. Most people I know who get a combination of things, just push as much of it into the non tax category, and report what’s left for tax purposes. An exact breakdown is not required. So basically if tuition, fees, books come to $X, and scholarships are $X or below then, you don’t owe taxes on any of it. If scholarships exceed $X then subtract X from scholarship amount to get the amount that is subject to calculation for possible taxes. Again, I am not a tax person, but this is what I’ve seen done. The IRS really don’t care abput precise breakdowns. </p>

<p>I do not see why you are letting it go that money from savings is considered income. That makes no sense to me. IT’s absolutely WRONG. Do ask Kelsmom via PM as to how to fill out this form so that you don’t get funds transferred from reported assets as earnings. That is a huge problem. </p>

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<p>Hi, cptofthehouse. Thanks for the moral support regarding the “savings” versus “income” issue.</p>

<p>Actually, the IRS does care because they want us to pay taxes on the taxable portion of the financial aid received. I’m not saying they need a precise breakdown of how much money went towards tuition, how much went towards fee, etc., but they want one very precise number on how much was aid was issued and used for non-qualified expenses.</p>

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<p>I understand, but the money goes into one big pot and you yourself can allocate all the grants towards the allowable expenses. It’s not like you have to see what got paid how. When I got bills from the school for tuition, fees, room and board, and some scholarship money got thrown in there too, it just all got attributed to the allowable expenses. I didn’t sit there saying “gee, the deposit for the room was taken first so gotta attribut that to the scholarship”. It’s all just a mathematical exercise. My nephew gets ROTC money for books, tuition fees, for instance, but often he just pays for his own books or his mom just buys them or we do. He still just takes the actual receipts and runs then up against his ROTC award as do all of the scholarship recipients. They do not wait till the money is released that the military put in there to actually pay for the books. It’s all a paper transaction. THAT I know for sure. </p>

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<p>and a parent who can take the American Opportunity Tax Credit would likely choose to push enough grants/scholarships toward room/board (taxable) so that $4,000 of tuition was paid with non- tax-advantaged dollars.</p>

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<p>OP, I strongly believe you are correct in all the items you mentioned and the school is wrong and seems totally clueless about it all. Particularly regarding 94i. Very frustrating. And yes, if you weren’t aware of it, check out Madison85’s advice in publication 970. Up to $1000 of the AOC can be refundable.</p>

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<p>cptofthehouse, I understand my son was never actually “given” the money except for a few hundred dollars that was credited to his bank account because the amount that was awarded exceeded his expenses. My understanding is that when doing taxes we should take the total amount that was awarded, subtract out the amount that was allocated towards qualified educational expenses (like tuition), and report the remainder (including the amount that was allocated to cover his room and board) as taxable income. For example, if he was awarded $23,000 total in scholarships and grants, and tuition cost $11,000, we would subtract out the $11,000 and report the remaining $12,000 as taxable income.</p>

<p>Are you saying that since he never actually took possession of most of the amount that was awarded, then he doesn’t need to report it as taxable income? If so, that would be great! I’d just like to see some IRS language that confirms that.</p>

<p>Madison85 thanks for the heads-up on the American Opportunity Tax Credit. I remember looking into that at the time but I forgot how we resolved that. We’ll take another look at that.</p>

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<p>Ekatte, did you receive a 1098 T for your son for 2013? </p>

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<p>@Ekatte: Generally, to get the AOC of $2,500, $4,000 of the tuition/QEE must be reported as taxable. See also IRS Publication 970.</p>

<p>If for calendar year 2013, the student received $23,000 in grants and scholarships to cover $11,000 in tuition and $12,000 for room and board, then you could make $7,000 tax free (tuition/QEE) and $4,000 of the tuition/QEE, and of course all of the room and board ($12,000) taxable for a total of $16,000 taxable.</p>

<p>What was on the 2013 1098T? What is the COA for the period of attendance in 2013?</p>

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<p>Thumper1, yes my son received a 1098T.</p>

<p>Madison85, the 1098T lists roughly $22,000 in Box 5-Scholarships or Grants, and roughly $11,000 in Box 2 - Amounts Billed for Qualified Tuition and Related Expense, which is a little off from what I used as an example up above. The Cost of Attendance was almost exactly the same amount as what was reported in Box 5 of the 1098T for Scholarships and Grants (the amount was about $3 off). </p>