<p>Although we've known it was coming, it feels like it is so sudden that we are now in the midst of college apps and that figuring out the financials is real!
I'm reading some articles about making the most of the FAFSA and CSS forms.
I think we are mostly concerned with the CSS Profile.</p>
<p>I see the suggestion that having more $ from your paycheck go into a retirement account would act as a reduction to your income. Is that true? I knew that funds that are in the retirement account aren't looked at like regular savings, as assets, but do the contributions (made directly) really no longer count as income? We can do 403B, and need to do much more than we have been.</p>
<p>What about contributions to a medical spending account? </p>
<p>Then my H mentioned something about how you set up with holding (claiming more people up front, so that more is with held)...and that reducing income? Wouldn't that just come back at the end of the year if you overpaid on taxes, and be added right back to your income?</p>
<p>There is no point to over withholding income taxes. In fact, over withholding state income tax (if you itemize) will increase your FAFSA EFC in the following year when you include the refund on your federal return in AGI!</p>
<p>It’s very difficult to mess with your income figures which is the primary determinant of the EFC. Any contributions to qualified plans, HSAs are added right back to your income. What is used for students starting college in fall of 2015 is 2014 AGI as reported on the 2014 returns plus any contributions to those plans that were subtracted from AGi for federal tax purposes. You do get credit for taxes OWED, not withheld. Since the actual return is used these days with the retrieval tools, the numbers are taken off the actual return. You do not include refund of prior year overpayment of federal taxes in your subsequent year return, but the federal taxes used in FAFSA to reduce income are the ones OWED as I said above, so what you withheld isn’t going to help you, doesn’t come into the picture at all. </p>
<p>However, for FAFSA purposes, assets in qualified plans like HSAs and 401Ks, IRAs are not included in the asset calculations. But you get an asset protection allowance,and the hit on assets over that is about 5.6% in the FAFSA formula, unlike the the 2 figure percentages that are applied to the income. </p>
<p>PROFILE schools can do what they please, but they do tend to leave alone retirement money unless it’s what they feel is a huge amount–differs school to school what that threshold is and how they handle it and they ain’t telling. Some folks I know with sizeable 401k type assets did not think much if anything was tapped on that type of money. I don’t know if NPCs for such schools ask for those assets, But things change year to year.</p>
<p>As mentioned above, your retirement contributions will get added back in because the assumption is that you could put those on hold and pay for college.</p>
<p>Add’l withholdings is also nutty since that increases income the following year. </p>
<p>It is hard to do any financial gymnastics to reduce EFC…especially during the child’s senior year of college.</p>
<p>Actually if you overpaid federal taxes and expecting a large refund you should submit FAFSA and CSS Profile before you get this refund posted to your bank account. As mentioned above overpaying state taxes is not a good idea as it will increase your federal AGI. You can only hope that schools that use CSS Profile will remove this amount from their calculations. If you overpaid state taxes you can adjust your Federal Schedule A to deduct the amount of state taxes that you owe and not the amount that you actually paid but it will most probably confuse tax programs like Turbo Tax and you will have to file on paper and then keep track of this next year. </p>
<p>Thanks guys. I guess I just have to come to terms with this. Actually I felt like I had, but then I read something that makes me start wondering again, and feeling like I might be missing out on a way to optimize our FA.<br>
But now I am a little confused about the issues with paying too much in taxes. I get that it isn’t going to reduce AGI, but won’t it end up being basically a wash if you overpay by about the same amount each year (forced savings sort of thing…I know…not the best savings plan, but lets set that aside for another lesson lol)…So say we over pay by 10k one year, get it back as a refund the next, and repeat, repeat, repeat. Does that effectively reduce, and then increase income by the same amount?..and give me a lump sum that I can sign over to the college…? b-( </p>
<p>Yes, if the timing of the federal refund is right you will decrease your assets considered for finaid purposes by 10K. It may or may not make a difference depending on your overall financial situation and college in question.</p>
<p>Strictly speaking, payables are assets. I don’t know what FAFSA officers would do with a return showing a $10K tax refund payable, but some PROFILE schools may catch that . </p>
<p>Over paying federal taxes does not decrease your income for FAFSA purposes. The income to be used is your AGI less the taxes you OWE, not what you have paid or had withheld. Because of the direct verification tool to your return, that now can link to FAFSA. the calculated amount that you actually owe for the year in federal taxes is right there to see for anyone. </p>
<p>You can play games with these things and see what it does to your expected contributions but the NPC won’t show what the effect would be in subsequent years when you get, say your state tax refund for over paying state tax, and that is added as income. </p>
<p>Changing your withholding doesn’t change your income. Your W-2 is still going to say you earned $100,000 whether you claimed 6 exemptions or 2. The question isn’t what is your take-home, but how much you earned. FAFSA doesn’t care if I buy dental insurance and pay the premiums through payroll deductions or contribute to United Way or if my employers sponsors a Christmas Club savings plan; the question is what is my income, not what I do with it.</p>
<p>It’s really foolish that so many people overpay on taxes and get a big refund each year. Why let the govt have you money all year, when it could be invested or at least earning a little bit of interest? Not smart. have a little discipline. Put the money in a 529, ESPECIALLY if your state gives a state income tax break for 529 contributiions. We saved $1100per year in state taxes by doing this.</p>
<p>You might be able to bring down EFC by playing around with all of this. It’s just that it’s usually not that much money. When you contribute to an IRA/401K/HSA, for example, you have to add those contributions back to your income for FAFSA purposes. However, you reduced your taxes when you made those contributions. However, the reduction in taxes means that you get more income used for FAFSA because what FAFSA does is take your AGI and ADDS BACK THE CONTRIBUTION, but then it subtracts out what you owe in taxes. When you owe less in taxes, you have more FAFSA income there. Makes ones head spin. Usually, if not most always, you still make out overall by contributing to your retirement, particularly when you consider you are having more money available for your old age. Paying for college is only part of ones financial picture, you know. </p>
<p>Since most schools do not meet full need anyways, it’s not as though, you get what need met by any given college. My friend with an EFC of zero, did get federal aid, state aid and some money from the college for her kids, but they still had a balance due on the bills each year. She and her kids had to come up with that money, never mind the need. So you can do all these gymnastics and find that most schools still expect you to pay despite what your need turns out to be.</p>
<p>LOL @momcat2, yep…there are definitely some things we could be handling better with our financial planning…working on it. We used to be solidly in the ‘don’t get a refund’ camp, then one year, we somehow miscalculated and had to pay a painful amount, decided then we’d rather err in the other direction. No state income tax in our state. </p>
<p>The IRS has an awesome withholding calculator on their website. You enter info from your last paystub, how much you think you’ll make this year, adjustments to income, etc, and it tells you what to change your withholding allowances to so that you will come put just about even - either a tiny refund or a tiny amount owed.This is a good time of year to do it. Did it recently for my daughter, who thought employer was taking too much out of her check. They were, partly because she just started this job in March. She would rather have the money now, since her student loan payments have started up, than get a refund.
I use the calculator pretty much each year, to avoid any surprises.</p>
<p>Yes, definitely review your W4 every year. My husband’s employer had them fill out a new one every year.
We needed to change ours because last year we had 3 kids qualify for child credit and this year since our oldest is 17 we only have two kids who qualify.
You can even check during the year and see if enough is being withheld.
For students it depends how much they make a year and if they might have taxable scholarships to report and then it’s good if they don’t end up owing money.</p>
<p>We have always felt we didn’t have/make enough money to warrant talking with a financial planner, etc. but we have realized we now may have some options and need to get advice. We have actually gone as far as to set up an appointment with a financial advisor! Progress! </p>
<p>@shoboemom, well, progress is in the eye of the beholder. Please be careful with the advisor. Many are nothing but disguised insurance salesmen (variable annuities and that kind of junk). Don’t sign anything. </p>
<p>Go to Bogleheads dot org if you want information and discussion with people whose income doesn’t depend on your money. </p>
We used to be solidly in the ‘don’t get a refund’ camp, then one year, we somehow miscalculated and had to pay a painful amount, decided then we’d rather err in the other direction. No state income tax in our state. </p>