Hi, long time lurker. I have two boys, one will be a junior this fall so he is class of 2018.
I was laid off in May this year and received a severance package. Since the FAFSA rules have changed, am I correct that when my older son applies to college in fall 2017, FAFSA will look at my 2016 W-2, which will include the severance payment? (So we’re screwed, at least for the 2017 FAFSA, right?)
Thanks, just trying to wrap my head around planning.
Severence is income in the year it was received. You will use your 2016 tax returns when completing the 2018-19 fafsa application. You aren’t screwed, you just have that income in that year, just as if you had worked. If you also had another job, the income might be a bonus, more than you normally earn. Again, not screwed, just earned more.
Thank you for the reply. It would have been preferable for me if we could have used 2017 return but that’s how it goes. Thanks!
Keep in mind however, that schools will take into account new financial circumstances. If your income is much lower going forward, you want to make sure you contact schools’ financial aid offices directly during the process to ask how to go about getting a financial aid review/submitting updated income information.
2017 is six months from now. Don’t you hope you will have a new job by that time?
You will use the 2017 tax year for the 2019-2020 school year.
WhataProcess: Thanks, I didn’t think to let the schools know about the severance. It is a bump to our income - a good bump overall, I know, but not in regards to the FAFSA. 
thumper1: I actually just started a new job, similar in income to previous. However, with severance pay, our income for 2016 will be higher than what we had in 2015, and fairly higher than what we expect for 2017. Also, our older son is class of 2018, so we will use 2016 tax year for FAFSA.
Thanks for the feedback and thoughts!
Since you have started a job, I would suggest you put the remaining severance money in a bank account to help with college costs.
Also, if your income is above a certain threshold even without the severance, you may not have gotten much need based aid anyway.
Will your student for sure be attending a college that meets full need for all, and has generous need based aid awarding? If not…your increased income might not matter at all.