I own an S corp and my salary is about $70K. But on paper, due to the pass-through income from the company, my income is $250K. Is there any hope of getting financial aid for my kid, who is currently a high school freshman?
This will depend on the college. Just remember…the net price calculators will not be accurate for you child. Use them with extreme caution.
Similar situation here and even with son attending an expensive private university and another in a public university we aren’t getting any aid other than unsubsidized loans and parent plus loans. Speak with your accountant - ours has given us some ways to help manage the college expenses.
Doubtful. That S-Corp income is pretty high, compared to your actual salary. (As an aside, that can be a red flag to the IRS if consistent over several years. Not sure what your businesses is, but clarify with your accountant that your salary/corp income are within acceptable percentages.)
As a parent, I would be looking at merit and not need-based, also saving as much as possible, so you aren’t surprised by your expected contribution in 3 years.
What does your accountant say about ways to reduce your Corp income for the college years ahead?
None of the $250k is distributed to you?
What is the other $180,000 getting spent ON?
I suspect that your income for purposes of financial aid consideration is $250,000 regardless of how much–or little–you label as salary. Or is there something that we don’t know that would explain the difference between your “salary” and your “income” ?
We do get a dividend to pay taxes (which are $40K or so) and I end up with about $45K annually from dividends after all is said and done. The rest of the profits stay in the company. The extra money from the dividend gets split up among 529 plans, an HSA, IRAs, savings, and ordinary expenses.
I was hoping the FAFSA would somehow differentiate between actual money received and money reported on paper, but it sounds like any hope of financial aid is a pipe dream. I started looking at merit scholarships yesterday. Thanks for your help.
Your dividend goes into savings? That’s real income, regardless of how you think about it. You could elect to have that money go directly into your paycheck if you wanted to. 529? Those are voluntary contributions you are making- again, that money could do directly into your paycheck. And you’re getting a dividend to pay taxes- you do realize that for most wage earners, the tax comes OUT of the paycheck, the check doesn’t get grossed up to cover the tax liability?
You make more money than you think you do!!!
A C corp is much, much better for FAFSA purposes as you can exclude the value of family held small businesses, and exclude from income any healthcare reimbursements and (if structured appropriately) contributions to company pension schemes. Taxes are now much lower, but you do still have double taxation of any dividends.
So it will depend whether that is worth it to you and other shareholders as you do have time to make a change if need be (though you would have to consider if the company has or can raise the money to make distributions to shareholders). I used a C corp structure mostly due to the healthcare reimbursement advantages (many years ago), but found it useful in the college financial aid process too.
I think you’re misunderstanding need based aid. The FAFSA is a free application for federal grants that are awarded to students whose family’s gross income is about $80k. Families whose net income is $80k aren’t likely to get any federal aid.
Institutional aid is different. Some colleges do offer need based aid but you have to fill out the CSS Profile. The “money reported on paper” is income. Some deductions are allowed, but I wouldn’t expect them to allow you to write off $180k. You’re in a tough spot because net price calculators probably won’t work for you. Make sure your child has financial safeties on their list.
You were hoping that these things, that others pay out of real income, should be ignored for you?
^ the OP was just answering a question, not asserting that dividend income should be treated differently for him/her than for anyone else.
OP, it’s more the CSS profile and business supplement that you’ll want to look at. That what the most generous schools will use (some, like Princeton, use their own form). They’ll also look at your 1120s. Yes, your pass through income plus salary will be treated as income. Income that you don’t actually distribute, but keep in the business, will actually be counted again as savings when you state your business value.
I’d suggest running the NPC at Princeton and MIT. Those will be best case scenario need based aid. If it appears there’s any chance you’d get some aid, it’d be worth sitting down with your cpa and the css profile business supplement to see if you can restructure some things to your advantage. For example, is the business paying for health insurance, can you replace employee retirement contributions with an employer-funded pension plan, etc. You’d have some time to make some of these changes as the first relevant tax year is 2 years prior to your child starting college.
In the end you might find that your business value plus pass through income make it highly unlikely you’ll qualify for aid. Most schools look at home equity also, though not the two I listed.
Your posts are confusing.
Are you saying that your salary is $70k but you ALSO get a dividend of $85 of which $40k goes to taxes, $45k goes to that list you wrote (IRAs, 529, etc), and then some stays in the company?
If so, then it’s really not true that you only earn $70k per year. Sounds like you’re earning over $150k plus whatever stays in the company.
And how are you handling things like cell phones, cars, gasoline, car insurance, etc? Are you deducting them as business expenses?
How much are in 529 accts?
How much are you putting in IRAs, retirement accts each year?
How much do you plan to spend on college each year?
What is your income if you take the $250k and subtract obvious deductions like materials, repairs, etc. Don’t deduct things like depreciation, car leases, cell phones, etc.
You need a strategy…
Run the Net Price Calculators on various schools’ websites (but be aware that schools like HYPS give super aid so not typical). Run the Net Price Calculators using the $150k+ income on some instate publics’ websites, some OOS publics, some mid tier privates and some reach schools.
First identify a few schools that your child likes and will FOR SURE give your child large merit for stats. These can be your child’s financial safety schools.
Then using the NPC (again, using the much higher income), run the Net Price Calculators and see what’s affordable.
You say you are funding a 529? Perhaps a good plan would be to fund that a LOT more than you are currently funding it…from your business earnings. Is that possible?
Another thing to remember…any contributions made TO a tax deferred retirement account for your FAFSA/profile tax year is added back in as income. That would be for both you and your spouse. So…look at that number as well because it most definitely will count.
And remember too…the financial aid forms use prior prior tax year. If your kid won’t be a college freshman until 2022, then the 2020 tax year and income tax for information is what will be used. That year hasn’t even started…
Does your spouse also have an income ?
What about your assets?
Savings, non-protected-retiment investment accts, properties, etc?
Many css profile schools look at home equity.
How much equity do you have in your home? Home’s value minus mortgage?
I would strongly suggest that your student do the very best they can in terms of GPA, and standardized test scores. Then when the time comes, look at affordable colleges, and this can include those that have guaranteed merit aid for her stats.
Merit aid won’t take your income and assets, and business income into consideration.
Cast a broad net…look at your instate public universities. Those might be your best bet financially.
No student MUST attend a $70,000 plus a year college. So shop around for affordable options.