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Yes, but that formulation is triggered only if the family files a 1040a or 1040EZ, not the 1040. </p>
<p>In addition to investment income, Steve has capital losses, so to accurately reflect his tax situation, he would need to file a 1040. He says that makes a $2000 difference to him in taxes, so it would seem that the actual loss would be greater than $2000, but the maximum that IRS allows in a capital loss is $3000 and with his taxable income, he can’t possibly have a very high tax rate … so that’s just one other spot where the math doesn’t quite work out to support his story. </p>
<p>That is, based on his claims, he should be in 15% tax bracket. 15% of $2000 is $300; 15% of $3000 is $450. So the maximum amount that anyone can reduce their taxes by taking a capital loss is $450… and yet Steve has framed this debate as if he should subtract out $2000 from a Pell grant in order to determine net savings. </p>
<p>But the main point is that capital gains and losses are reflected on a 1040. If Steve had a gain rather than a loss, then he would be mandated by law to file the 1040 – even if it was a gain of only $100… because the IRS requires that all income is reported. However, IRS doesn’t care if people don’t report their losses, since losses don’t result in revenue to them.</p>
<p>NYU’s position is that they can look at the overall financial situation, and if they see that someone has filed a 1040a when they think the person ought to be filing a 1040, they can use Professional Judgment to correct the FAFSA. Given the way that the FAFSA is filled out online, financial aid departments must see this all the time – it probably is one of the first things they look for, because kids who don’t have a clue about the tax system probably unknowingly check the 1040a box all the time, and colleges are probably always having to correct that and collect the missing information about other assets and untaxed income. </p>
<p>Steve disagrees with NYU’s determination and argues that NYU can’t do what they are doing. I say they can, for a very simple reason: they HAVE done it, they have made clear they did that knowingly and deliberately, and they are in a position where they have the ultimate power. I do not know of any procedure for appealing or protesting a college financial aid office determination with the Dept. of Education. In theory there should be one, but I have to say – if there was, I think I would have heard about it by now. </p>
<p>Note: the Dept of Education does review college financial aid/ professional judgment decisions, but only on a broad basis, by selecting some colleges for institutional review, and basing that selection at least in part by the overall percentage of students at a given institution whose FAFSAs have been corrected due to professional judgment. Thus, NYU could be subject to review if, for example, the record showed it was fudging with 60% of all the FAFSA’s – but a college the size of NYU is probably very much aware of what numbers might trigger Dept. of Education review. </p>
<p>Other than that, I think the system is set up to mean that the final determination is, and will always be, made by the particular college financial aid department. So being that NYU is the final judge as to this applicant, they can interpret the regs however they want. In this case, they think this is is an applicant who ought to be filing a 1040 and not a 1040a, and that’s the last word as to their aid. </p>
<p>Since NYU has the power to make the determination, then they can indeed do whatever they want. </p>
<p>That’s not a comment on the equities, although I think my position on the equities is pretty clear. I would say this: if I was in charge of making rules for financial aid and meeting 100% need, then I wouldn’t care what kind of tax return the family filed. I would think the most equitable approach would be to count ALL of Steve’s income and ALL of his assets, subtracting out the income protection allowance of, let’s say, $22,000. So lets assume for sake of argument that the total amount of Steve’s bond holdings is $800,000 – I subtract out $22 (income protection allowance) and that leaves $778,000. 5.6% of that is $43,568 - to be added to EFC, on top of whatever is required based on his income (let’s assume the income sourced EFC ends up being $7000, bringing total EFC up to roughly $50K). </p>
<p>I’d figure that if Steve really wants to pay $50K for college, then he can cash out some of those bonds. If he’s smart, he’d cash out whichever bonds had the lowest yield. That would cause a small reduction in his 2011 income, meaning that the following year he would probably end up with a smaller EFC. So over the years, his kid might end up qualifying for a small amount in work study or subsidized Staffords. Alternatively, if he were smart, he’d send his kid to a cheaper school – his choice.</p>