<p>I have some mutual funds in a non retirement account. I also have considerable CC debt. If I sold those mutual funds and paid down the CC debt, would it have any (negative or positive) impact on my child's ability to secure financial aid? Would the timing matter?</p>
<p>Thanks</p>
<p>Well the income from selling them would increase your reportable income so that would increase your EFC.</p>
<p>The reduction in your assets may or may not make a difference. if your total reportable assets are over the amount of assets protected in the EFC formula then disposing of some may reduce your EFC. But assets have a lower impact on the EFC than income.</p>
<p>And it depends on how much of everything you have in the first place. That is how much income, how much assets etc.</p>
<p>Two things:</p>
<ul>
<li><p>if selling the mutual funds results in a realized capital gain, you will need to report that gain on your taxes. The net gain will increase your AGI.</p></li>
<li><p>if you use the proceeds to pay down credit card debt, then the amount spent will no longer be considered a reportable asset for financial aid.</p></li>
</ul>
<p>As far as the timing, if you decide it makes sense from a big-picture perspective to sell an investment in order to pay down debt, this should be done before you file FAFSA (typically filed in January). Whether to do it in 2010 or 2011 might depend on what Congress decides to do with the capital gains tax - if you’re in a high bracket, you’ll pay 15% this year but might pay at the 37% marginal rate in 2011.</p>
<p>Note that parent assets only add at most 5.6% to your FAFSA expected family contribution. Some amount of assets are protected, so if your total assets fall under the protected amount then they wouldn’t add to your EFC to begin with.</p>
<p>Example: say you have $10,000 in a mutual fund that has an unrealized gain of $1000. That money adds $560 to your EFC. Selling that means you realize the gain and pay taxes (at 15% for 2010) on the $1000. Now you have $10,000 in cash. If you spend it all on paying down credit card debt, it’s no longer a reportable asset for financial aid (and you probably save $1000s of dollars in interest).</p>
<p>You can do the math to figure out if this makes sense in your particular situation.</p>
<p>Thanks a lot for the quick responses. </p>
<p>Let me get this straight. I am in a low tax bracket (may be no tax at all in 2010) and there may not be any capital gain from the sale of this MF. In this situation if I decide to sell say $10,000 worth of MFs and pay it all towards CC debt, nothing will be added to the AGI and none of this need be reported on FAFSA form. In short, I am actually reducing the parent’s assets by $10,000. Am I right? </p>
<p>I’ve a very low AGI. The assets (unprotected) that will be considered for EFC are equity on a rental property, 529 and the investment account that I mentioned in the original post.</p>
<p>Please correct me if I am wrong.</p>
<p>You’re right :)</p>
<p>If you’re in a low bracket and there’s no gain (or loss) then the sale of the mutual fund isn’t taxable at all and won’t affect your AGI. What you do with your assets isn’t reportable; to the extent that your assets have an impact on your AGI, that’s what gets reported on FAFSA.</p>
<p>For the rental property, you’ll report the actual net value (the likely sale price minus any debt on the property). If you have income from the rental property, that would have been included in your AGI.</p>
<p>Here’s a sample of asset protection allowance (age, allowance if married, allowance if single):</p>
<p>50… $52,900 $20,500
51… $54,200 $21,000</p>
<p>Thanks a lot for clearing my doubt.</p>
<p>Now that we touched upon other assets, let me ask a related question. We are currently renting. Our only house, which was originally purchased as primary residence is currently a rental. Is there a way to ‘protect’ this house? The equity on this house is the major factor that affects the financial aid at this point.</p>
<p>The value of the home you live in is not a reportable asset for FAFSA. The only way to convert your rental property to a non-reportable asset would be for you to move back into it and make it your primary residence.</p>