I feel like the more research I try to do on how inheritances are handled for purposes of financial aid, the more confused I get. 8-} So maybe someone more experienced here can help me out.
When my mother passed in 2014 (after a thankfully long, happy life!), it took a while to settle her estate as the bulk of the value was in her home which had to be sold. I received a portion of her estate in 2015, and my husband and I promptly plowed the entirety of it into improving our small business. Now that FAFSA/CSS are switching to prior-prior year, this inheritance is sitting heavily on us for 2015 as untaxed income, yes? Even though the entire value was put into our business (where the asset value still sits), we have to report the sum of the inheritance as untaxed income?
I have heard that people report the income as required on the forms, but then ask the FA offices to disregard it as income as it is a one-time thing, and just count the asset value. So, Question 1) Do schools actually do this? Because in our case, it makes a huge difference. Using Georgetown’s NPC as an example: if they don’t count the inheritance as income but just the asset value as reported in our small business value, the NPC shows us at an EFC of about 40k, which we can do. Having to count it as both income and asset puts us at full pay, which we can’t do.
and Question 2) If they would count the inheritance as both income and asset for 2015 tax year, it sure seems like we could save 30K by having D take a gap year and re-applying for FA next year when our 2016 taxes will just show our regular income and assets without the bump of the inheritance. Is this the case?
That said, usually NPCs do not work well for those who own businesses. some of the deductions you take will be added back in as income…making your EFC higher than you thought it would be. If that ends up being the case, taking a gap year won’t matter…your EFC may always be very high.
To protect your DD, have her also apply to some schools that will give her assured merit for her stats. That way, if you find out that either way, your EFC will be too high, she’ll have alternatives.
Thanks @mom2collegekids that’s what I thought (feared, lol.) Is it worth calling individual schools to see what they say, or is that not the kind of question they would even answer? It’s all so opaque.
She will be applying to state schools for safety (we’re in NY so we have Binghamton, Buffalo, and Stony Brook as university choices.) She’s got quite decent stats (4.0 uw, 33 ACT, top 10%) so will go for some schools with guaranteed and some with likely (though not guaranteed) merit as well so she should have some choices regardless of EFC outcome. I’m just trying to figure out whether she should even bother applying anyplace that is need only, or if the gap year would make any difference.
“Inheritances are not considered income for federal tax purposes, whether you inherit cash, investments or property. Any subsequent earnings on the inherited assets are taxable, however.” (Fastweb)
There can be a FA issue when, eg, you inherited stocks, which are now in your name or the child’s. Or the money sits in the bank (or almost everything short of a “qualified” retirement plan.) So the issue is the business, it’s value, what it generates to you, in the complex way they look at that.
But doesn’t the sum received itself have to get listed as “untaxed income” (under all other untaxed income not specified or however they phrase it) because I received it during 2015? The cash did flow through me to the business (where its asset value now sits).
That’s why I was asking about the gap year - if waiting a year cleared that reporting requirement off the form, and I just have to deal with the asset value once we’re into the 2016 tax year.
Right, I get that. But running the NPC taking into account the asset value as part of what I reported in the value of the business, but not counting the sum of the inheritance as untaxed income, came up with an NPC number that was feasible for us. Having to count the sum of the inheritance as untaxed income on top of that, pushed the EFC to full pay. A gap year would get rid of the having the money counted effectively twice - as both income and asset.
I do understand that just running the NPC may not give me a very accurate EFC as a small business owner and as @mom2collegekids says, it may be higher than shown anyway because of what they do or don’t decide to count, but the inheritance counted as income on top of everything else is a guaranteed killer.
Inheritance isn’t “income.” That’s where you start. Don’t get tripped up by “untaxed.”
You can look at the Fafsa definition of “untaxed income” or the CSS worksheet. There, untaxed income refers to: “deductible IRA and/or Keogh payments, payments to tax-deferred pension and savings plans, SS benefits, child support, certain welfare benefits, untaxed portions of pensions.” Etc.
Fafsa: “The response indicates the total amount of any other untaxed income and benefits that the student’s parents received in 20xx, such as workers’ compensation, disability, Black Lung Benefits, Refugee Assistance, untaxed portions of Railroad Retirement Benefits, or wages not subject to taxation by any government. Also include the untaxed portions of health savings accounts from IRS Form 1040-line 25.”
@lookingforward Thank you, that’s very helpful - I have been reading such conflicting things about this. You’d think it was a common enough occurrence that FAFSA listed official guidance for it, but they don’t!
In researching, however, I did come across this post from someone here on CC last year who said:
So I’m going to cross my fingers that that’s the answer!
When an estate is settled is when taxation issues get resolved. What comes to heirs is neither taxable to heirs or non taxable income. It’s a gift. Certainly if heirs took gift and say it generated income (eg, interest), then the income would be taxable, but not the gift. Depending on what comes to heirs however could be treated as an asset for FAFSA purposes. Here it would probably get caught up in OP’s business calculation but as to how is beyond my pay grade.
You’re absolutely right about this. The same situation occurs with life insurance death benefits, which, while technically not an inheritance, can represent a potentially large sum of money that someone comes into because of the death of someone else. I echo your frustration that such a common occurrence isn’t explicitly dealt with in both the FAFSA and Profile instructions.
lookingforward makes a persuasive argument, although I believe that the types of “untaxed income” that are cited in both the FAFSA and Profile instructions are meant to serve as examples as opposed to being an exclusive list. The safest thing to do, but which also gives you the possibility of getting the answer that you don’t want to hear, is to call the FA office of each school to which your daughter will be applying and ask how they think you should report an inheritance – as untaxed income in the year in which it was received as well as an asset if you still have all or any of it, or just as an asset?
Don’t make the mistake of deciding that since something is treated one way by the tax code, it is treated the same way for financial aid consideration. There are plenty of examples where the two systems diverge. Also, gifts to students are specifically asked about on FAFSA (FAFSA item 45.j.).
I don’t see anything in the section you refer to that addresses an inheritance. To be clear, I don’t think that you are necessarily wrong, but like thermom I would like to see something explicit one way or the other from both Federal Student Aid and CSS.
Now… The impact of your business investment may not yet be seen, correct?
So…assuming that your business will be seeing an income increase in the near future, how will THAT affect your EFC? Of course, an increase in income may increase your ability to pay…or will you be putting more money into the business?
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Is it worth calling individual schools to see what they say, or is that not the kind of question they would even answer? It's all so opaque.
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I don’t know how much they can tell you over the phone. Are you going to provide them with a list of deductions ? Seems too complex for a phone call.
Please please. Look at the cup as half full instead of half empty! You received an inheritance that enabled you to invest in your business. Presumably this makes your business a better one…and you will better be able to provide financial support to your family.
OP what does your DD want to study? With her stats she has full tuition at a number of places as long as you apply in time.
What is a good fit for DD as far as size of school, campus town/city, and what has felt ideal or very good on the schools visits?
Does she want to stay geographically close?
You may be not exploring some great opportunities while you are going down this road of FAFSA or CSS Profile, when it may be that you just self fund what scholarship doesn’t.
Are you looking at keeping out of pocket below $15,000? $10,000?
There are some easy/quick applications that can be financial safeties for you outside of the ones you mentioned.
@mom2collegekids Yes, if the impact of the inheritance rolls forward into creating greater success for our business that will increase our EFC, but also our ability to pay? We’re okay with that. We understand the system. But right now the business is just in the getting off the ground stage so the double hit on the inheritance would have hurt badly. A couple of years down the road, and by the time my D23 (ack!) is getting ready to head off to school, hopefully we’re whistling a happier tune.
@BelknapPoint The inheritance was in my name, not my D17s, so there was no gift to her in the estate. But yes, the fact that there is no clear guidance for this very commonplace occurrence strikes me as the sort of deliberate obfuscation that drives people crazy about government systems and bureaucracy. Living and dying - there really isn’t anything more basic. This should be clearly covered if Black Lung Disease benefits are!