<p>I am filling out my renewal FAFSA and am wondering if anyone has any experience with this: that is, does a small inheritance (30k) negatively effect grants/loans in any way?
As far as i can tell, inheritances even if small must be reported to them, cause its income.
thanks for any thoughts anyone .</p>
<p>I believe it does.</p>
<p>Is the $30K going to the parent or the student?</p>
<p>to student (me)
(Thanks for the reply)</p>
<p>35% of student assets are available for tuition</p>
<p>So does that mean his FA package will drop by $10,500 because of his inheritance?</p>
<p>That's correct.</p>
<p>Inheritance doesn't count as income, but it does count as an asset if it still exists in liquid form on the day you complete the FAFSA. Student assets hurt the most, because the student doesn't get an asset allowance (parent's do), and students get hit at the 35% rate annually.</p>
<p>So yes-- as it stands, the 30K inheritance will increase your EFC by $10,500 the first year, and thereby decrease your potential aid by $10,500 (this assumes that you'd be eligible for aid in the first place-- if your parents have very high income, it may be moot regardless).</p>
<p>So:</p>
<ol>
<li><p>Try to discourage grandparents (and other family) from leaving assets in the name of kids bound for college, if financial aid is a consideration.</p></li>
<li><p>If you're stuck at this point, remember that the FAFSA is a snapshot on the day you fill it out. If you have any expenses, spend the inheritance down before filling out the FAFSA. Planning on getting a computer or a car for college transportation? Get them before filing.</p></li>
</ol>
<p>Then-- spend the student assets down as much as possible your first year, before filing the FAFSA for your second year.</p>
<p>but don't spend down $10,000 on stuff you wouldn't buy anyway, just to gain $1,000 of finaid.
Doesn't make sense.
Hey I know, apply it to a down payment for a condo in the college town! ;) ( its more than I put down for my 1st house)</p>
<p>first of all thanks to all for the info.
here is what concerns me: FASFA online form asks
"As of today, what is the student's (and his/her spouse's) total current balance of cash, savings, and checking accounts (question 43)? (Do not include student financial aid.): Enter whole dollar amounts in this box, and do not use commas." my $$ is exactly that form --liquid. but if i spend it down, say buy a nice car, isn't the car an "asset" now? or isn't a house an asset for that matter? also, what about putting $$ into an CDs or money market or sumthing??thanks.</p>
<p>Only certain assets are counted.</p>
<p>You liquid assets (checking and savings) count. A car, or a computer, doesn't. A house doesn't ( for FAFSA purposes-- colleges that use the Institutional Methodology require the Profile, and the Profile considers home equity).</p>
<p>Putting it into a CD or Money Market won't help-- you'd have to report it the same as if it was in a checking or savings account.</p>
<p>You can pay down debt, or pre-pay some payments, or buy something to convert it from a liquid asset to a non-liquid asset.</p>
<p>Sblake,</p>
<p>Would the same advice apply to a school that requires the profile?</p>
<p>sblake
thanks for responding to this post. You have a way of explaining difficult things in an easy to understand way.</p>
<p>sblake, I reread your last post. It made more sense to me as I read it again. I am thinking that the advice you gave applies to a profile school as well (except as you clearly stated, for the house, which is an asset on the profile). This information is very important to know, so thank you very much.</p>
<p>NEMom:</p>
<p>The principles are the same (as regards student assets) for the Profile as for the FAFSA. The forumulas are somewhat different, though. Profile assesses student assets at 25% instead of the 35% for the FAFSA. There are lots of other differences-- primary is the treatment of home equity, as you mentioned. If you're cash poor but house rich (as many in California are) you'll do much better under the FAFSA than the Profile in terms of aid eligibility.</p>
<p>My mom ran into a similar problem. In 2004, she inherited some money in the form of an IRA. She cashed out in late 2004 and paid off debt with it in 2005. The debt she didn't pay off, she settled with the credit card companies. The inheritance doubled her income in 2004 and her tax liability was huge. The amount of debt that was cancelled in 2005 was reported to the IRS as income and she has to pay taxes on it. For the FAFSA, under "other income" she had to report the debt that was cancelled even though technically it wasn't income. She didn't know at first that the debt cancelled was going to be counted as income so when she first filed the FAFSA, our EFC was low. AFter having to report the cancelled debt, our EFC increased 4 fold. Mom's earned income is $15,000 a year, our EFC is $4,500. Mom also has to pay IRS $3,000 (on the cancelled debt) and $2,500 for a recent ER visit (mine) and wisdom teeth extraction. My mom is thinking of selling assets to pay for college tuition but says she will of course have to pay taxes on the income she receives from the assets she sells (jewelry, artwork, etc.). Bummer situation.</p>
<p>sblake, Thank you so much for your response. What I was inquiring about was if you would do the same thing with an inheritance when considering a profile school as you would when considering a fafsa only school. If the princples are the same, then I guess you would. Thanks.</p>
<p>shopper:</p>
<p>That doesn't seem right to me, but I'm not a tax accountant. Inheritance generally isn't taxable-- and I don't know why 'canceled debt' would be treated as income. Seems to me that if it was received in '04 it would have to be reported on the FAFSA for that year ('05-'06 school year)-- and thereafter it wouldn't be a reportable income event, but possibly an asset. But if the asset is used to pay down debt in '05, it souldn't count as either an asset or income in '05 ('06-'07 school year FAFSA).</p>
<p>I have no idea why she should have to pay the IRS on 'canceled debt'. Also, selling assets doesn't count as income, so she wouldn't owe tax on that, despite what she indicates. </p>
<p>That's my understanding, anyway. Something sounds fishy-- suggest you get some good tax and financial planning advice.</p>
<p>oh- because the canceled debt is a write off for the financial institutions, the IRS does require that the debtor report it as income</p>
<p>*IRS sees canceled debt as taxable income
If you have negotiated with your credit-card company this year and gotten an agreement to repay only a percentage of the debt, you may be required to pay taxes on the forgiven amount.</p>
<p>The amount forgiven or canceled is termed a discharge of indebtedness (DOI), according to the National Association of Tax Professionals. All financial institutions must report forgiven or canceled debt principal (the amount not including fees or interest) in amounts of $600 or more to the Internal Revenue Service, the association says in a release.</p>
<p>In doing so, the financial institutions claim the debt as uncollectable and report it as a tax loss. The institution should send Form 1099-C to the credit-card holder at the end of the year with the forgiven amount shown as miscellaneous income.</p>
<p>"Because the consumer did not have to pay the amount, it is income in the eyes of the IRS," explains Cindy Hockenberry, enrolled agent and tax-information analyst at the National Association of Tax Professionals.</p>
<p>The consumer must pay taxes on the canceled amount, unless the money is: a gift or bequest, part of a bankruptcy case, qualified farm debt (debt incurred in operating a farm), qualified real-property business indebtedness, or if the consumer is insolvent (has more debt than assets).</p>
<p>Paying taxes on the canceled amount could push some consumers into a higher tax bracket, according to the association. For a taxpayer in the 35 percent tax bracket in 2005, a $5,000 canceled debt could cost as much as $1,750 in additional income taxes.</p>
<p>Not receiving a Form 1099-C does not let a consumer off the hook. Most likely, the institution reported the transaction. If the consumer does not report it on his or her federal tax return, he or she will probably receive a tax bill or worse, an audit notice.*</p>
<p>shopper:</p>
<p>it wasn't the inheritance that became taxable income, it was the fact that a (deductible) IRA passed to your mom, and she cashed it out. It would be no different that if the IRA was her own in the first place. Since a tax deduction is taken for an IRA when funds are deposited, all withdrawls are taxable as income. And, yes, debt forgiveness is taxable income, as well, in the tax year in which the debt is forgiven.</p>
<p>Obviously, both hurt.</p>
<p>sblake, Wouldn't there be a penalty and taxes, and it counting as income b/c she took it out of the IRA? Shopper's mom inherited an IRA account.</p>
<p>Oh-- I see. I was assuming she'd paid her debts off-- but she didn't pay them and the debt was forgiven by the creditor.</p>
<p>And you're right about withdrawing from an IRA. I should have read more carefully./</p>