NPC & SE health insurance deduction (1040 line 29)

Paying for College
1

This year we reported our s corp health insurance costs on our 1040 line 29, and took the deduction there. (In the past, we reported them on the 1120s).

Some NPCs (those using college board) seem to lump that amount in with all untaxed income. Some don’t seem to specify, so it does not get included in the calculations.

I am trying to get a sense from NPCs of whether some of the very generous meet-full-need schools would be doable for us. This amount (~20k) really does skew results.

In practice, do most schools treat all deductible health insurance costs as income, or is some sort of allowance typically made for health insurance costs?

2

Please clarify.

It sounds like you want it both ways…you want a tax deduction AND you want this excluded as income for financial aid purposes.

The Net Price Calculators are NOT usually accurate for folks who own their own business as it sounds like you do.

There are deductions allowed by the IRS for tax purposes that are NOT allowed for financial aid purposes. These ARE added back in as income.

3

For 2% or more S Corp owners, the cost of company-paid health insurance is included in (added to) W-2 taxable wages and then subtracted above the line on the 1040 in arriving at AGI (netting to zero effect).

This makes it somewhat equivalent to pre-tax health insurance that many employees receive.

4

@thumper1 Not sure what part of my question needs clarification, but I’ll try. I do understand some business deductions are not allowed for tax purposes. I’m asking about health insurance premiums in particular. I believe that for (non owner) w-2 employees, these expenses (incurred by the employer) are neither taxable nor treated as income for FA purposes. My question is whether schools extend similar treatment to insurance costs claimed on line 29. My assumption would be that they would strive for uniform treatment, but perhaps not.

I don’t follow you with the ‘want it both ways’ comment.

5

@Madison85 thanks, so to try to tweak these NPCs on my own to get close to correct, would you suggest not including those amounts in untaxed income?

6

@politeperson

The net price calculators will NOT be accurate for folks who own a business or are self employed …and it sounds like you are one or the other or both. The exception would be…IF that NPC actually asked if your income was from a business you owned.

Please…take the results of the net price calculators with a grain of salt if you own your business or are self employed.

In addition…the current NPCs are set up for students enrolling college in fall 2017. These usually get updated late summer…early fall for the NEXT academic year. Financial aid calculation policies DO change…so if your kiddo isn’t enrolling in college this fall, again, the net price you get might not reflect reality when your student DOES enroll.

And lastly…I don’t know when your student is going to college…but if it’s the 2018-2019 school year…you will use tax return information from 2016. If it’s 2019-2020, it will be 2017 info. Prior prior year.

7

@thumper1 Yes I appreciate the warning and definitely taking with a grain of salt. I have looked at nearly every thread I can find on businesses & NPCs, so I’m somewhat aware of the various ways they can be inaccurate. Most of those situations–home office, depreciation, extensive meals–don’t apply to us. We’re a very plain vanilla consulting partnership with rent, utilities, salaries, etc. as expenses.

Thing is, these NPCs do ask specifically about business income, equity, # of employees, etc. But the way they ask about ‘untaxed income’ on the personal side differs.

example:

MIT (& others using the college board system) ask specifically for the amount on 1040 line 36. This includes total of lines 23-35–IRA deductions, moving expenses…and SE health insurance premiums. (oddly, on another line it asks for deductible contributions to retirement plans like IRAs, so not sure if these are being double-counted?).

Princeton, on the other hand, asks for untaxed income and includes this explanation:

“Include:
Total IRA/SEP/SIMPLE contributions
Tax deferred pension contributions (such as 401K or 403B)
Tax-exempt interest
Foreign Income Exclusion
Housing, living, or food allowances received
Do not include military allowances
Child support received from another parent
Other income or benefits”

Stanford is similar to Princeton.

I’m not clear if the different treatment is intended–the Princeton language seems more logical.

Re: things changing–yes, we are early in the list building stage and will rerun these before applying. Just trying to figure out if we might be eligible for aid at any schools.as a starting point, which is what the Princeton estimator says it is for.

8

Stanford and MIT use the Profile.

Princeton does NOT use the Profile. But Princeton has its own form which is just about as detailed as the Profile is.

Really…most need based aid is income driven. Is your income really going to be substantially less than the number where need based aid is offered?

These are generous schools…Princeton and Stanford more so for higher income families than MIT.

Schools have different formulas for computing need based aid awards. Perhaps this is why you are seeing different questions on the different NPCs…because the schools use the info differently as well.

I applaud you for starting to investigate this early.

Another thing to consider…and yes…I know you didn’t ask for this advice…if your kiddo will really be a competitive applicant for places like Stanford and Princeton and MIT, that same kiddo likely could garner merit aid that would not consider your financial situation…at…all at other colleges.

Also…really…the MOST important number of all is what YOU think you can and will be able to pay for the four years your student is in undergrad school.

If finances are a concern…cast a wide net…including schools that are less costly, schools where merit aid can help lessen your out of pocket costs, and the like…as well as those lottery schools.

9

Has much changed since your first thread?

http://talk.collegeconfidential.com/financial-aid-scholarships/1903730-business-owner-and-npc-css-fafsa.html#latest

Really…AGI will be important…but some schools WILL query you if your gross income is very substantially less than your AGI.

10

@thumper1 not much has changed except the way we report these health insurance costs. Our prior cpa included them as a business expense on the 1120. Our new cpa says that was not technically correct, so now we deduct them on our 1040. Seems minor, but if it is true that this is added back to income for FA purposes, then it would be a net increase of $40k income for FA purposes. Hence my concern :slight_smile:

Yes, you read my mind with the talk of merit. We are starting with the best case scenario need-based aid schools. If any of those fit the budget then they can be included. If not, they stay off the list. The bulk of the list will be merit or in state.

11

Ok…I’m confused…you are laying $40,000 a year in health insurance for you and your family?

12

$20 k per year is what the company pays for our coverage. In the past, this was deducted as an expense on the business taxes before we received our k-1. We didn’t deduct it on our personal taxes. Now, however, it is no longer treated as an expense on the business taxes. So our profit on the k-1 has increased by 20k. But we deduct the same 20k on our taxes, so the net effect is zero for tax purposes. But if that personal deduction is added back for NPCs/FA purposes, then our income increases by 20k (lost personal deduction) on top of the 20k increase in profit (lost business deduction). It doesn’t seem like FA offices would intend that result, but I’m a bit biased :slight_smile:

13

The profit isn’t increased by $20k on the K-1 because shareholder wages are increased by $20k for this benefit (and reported on the W-2) while the S corp takes a corresponding deduction.

14

@Madison85 it doesn’t look like ours were done that way. No s corp deduction, and the amount wasn’t added to wages. Just passed through as a deduction on the k-1. I will check with the cpa for an explanation. Shouldn’t affect anything tax-wise, but does have an outsize effect on the NPC when done this way.

15

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

16

@Madison85 thanks for the link. I’ll forward to our managing partner. Any idea if colleges treat the deducted health insurance costs as income?

17

No idea, and there may not be a one size fits all answer.

18

Guaranteed there is NOT a “one size fits all” answer. Colleges handle expenses by business owners in different ways. Some don’t add back those IRS deductions…and some do.

Really…apply and see.