<p>Recently I (a parent) received an inheritance through a trust. As I was filling out the CSS profile and preliminary tax forms I was shocked to see that part of the inheritance will be counted as income on my taxes. Our family income has never been over 40k/year and suddenly it will be almost 200k for this one year. I see no prospect for making more than 40k/year in the next 4 or 5 years so this 200k income is an extreme abnormality. </p>
<p>I realize that I've been blessed with an inheritance and I'm willing to pay according to it being counted as an asset. I'm going to end up paying more in taxes this year than I normally make in a year. Also I will not be able to put any of it in a Roth IRA because our income is over the limit.</p>
<p>When I run the net price calculator for my child's desired school with the skewed, inflated income it causes my expected contribution to be almost 4 times more than if I had the same assets (the inheritance) but with my normal average income. </p>
<p>I freaked out and took a break from the Profile so I don't know if there's a section where you can explain extraordinary circumstances like this.</p>
<p>Question: do you think most FA offices would understand this and not expect me to pay as much as if I actually had income of nearly $200k?</p>
<p>Depending on where you put it (if you’ve received it) yes it will be treated as an asset because well it is. Financial aid is based on not just income but income and assets. People often get confused about that.</p>
<p>Assets are assessed by 5-6% (didn’t look up what it is this year) and income is generally a larger weighted percentage.</p>
<p>Generally, inheritances are not income, therefore not taxable income, therefore don’t need to be reported to the IRS. Why do you think your inheritance is income?</p>
<p>Regardless of it’s treatment on taxes it will be an asset of the household, and the impact would be determined on where it is. If you search there are a number of past threads on this as well as vigorous discussion about whether it is untaxed income or not relative to FAFSA and Profile. Hopefully someone who has gone through this will see this thread and chime in.</p>
<p>Momofthreeboys: I’ve got no problem with the inheritance counting as an asset, I expected that. The problem is that some of the inheritance shows up as if it were income on my taxes. It makes our family look like we had income (salary) of ~200k when in reality our actual income (salary) was less than $40k. If you run the net price calculator twice with the same amount of assets but with income of 40k and income of 200k, the result is with an income of 200k the expected contribution is 2.5 times as much as with the 40k income. Maybe I’m not explaining it clearly. [by the way, earlier I said 4 times as much. It’s really 2.5 times].</p>
<p>Annoyingdad: If it were just an inheritance it would not be counted as income. Since it is part of a distribution of a trust some of it will show up as income according to how it was invested by the person who set up the trust. This according to the CPA who distributed the assets and confirmed by Internet searches and calls to another CPA.</p>
<p>Is your child in college now, or just applying this year?</p>
<p>If your child is in college, pick up the phone and discuss the situation with the financial aid office. If your child is currently applying, contact the financial aid offices on the application list and ask them for a professional judgment, and see I’d anything can be adjusted based on your normal financial situation.</p>
<p>In either case, a year off for your child might be in order. That way you would have time to sort out your financial situation.</p>
<p>Roth IRA income limits are based on the adjusted gross income (with income greater than 183k you cannot contribute to a Roth). The part of the trust that is counting as income gets entered on line 17 of the 1040 which is included in the AGI. This is a side issue to the financial aid question and mentioned only because it’s another irritating result of some of the inheritance counting as income. Not really central to my question. Sorry.</p>
<p>What about regular IRAs? You would have taxes to pay when the money is taken out, but some of the money would be FAFSA-invisible in future years.</p>
<p>If you have a 401k or the like at work, you could maximize contributions for the next year or so and use the “new money” for living expenses. Talk with your accountant about that strategy too.</p>
<p>OK, you received an inheritance through a trust. The way trusts work is it is a separate entity, but is most often treated as a pass-through entity. When distributions are made, the portion of the distribution that is income to the trust is treated as income to you, and you pay the taxes on it. The remainder of the distribution comes from the trust assets, and is not taxable to you. Have you been told yet how much of the income is income vs. asset? This information will eventually be given to you in the form of a K-1, which is produced when the trust’s tax return is filed.</p>
<p>If the taxable portion is significant enough to push you out of the range where you can contribute to a Roth-IRA, and not all of it is taxable, this really was a windfall! Congratulations and condolences both are due.</p>
<p>I am familiar with taxes, but not an expert on the FAFSA or CSS. What I can tell you about FAFSA is that whatever portion has to be reported as income will be hit at the rate of almost 50%, pretty much making you full pay. Additionally, whatever is reported as an asset will be hit around 6%. First, you need the K-1 to know how much qualifies in each category, then you need to talk the the financial aid officers wherever you are applying. This would be most likely be considered an unusual circumstance, and can be adjusted at any school using CSS profile. Remember, those schools have their own institutional formulas, because it is their money that they are distributing.</p>
<p>As for taxes, if you already made contributions to an IRA or Roth IRA for 2012, you need to look into pulling the money back out to avoid penalties since you no longer qualify - you have time to do that, but will want to do so soon (and maybe turn around and recontribute for 2013).</p>
<p>Good luck - it is complicated, but in the end it’s not a bad complication to have to deal with.</p>
<p>Thanks CTScoutmom.
You confirm what I’ve been hearing elsewhere. I asked the CPA who handled the trust to send me whatever he could. He sent a “draft” K-1 and that’s where I saw the amount that will be counted as income (box 5).
Hopefully I can show the FA office my income from the past 10 years and they will understand that this is a one time abnormality and will base our aid package on my normal AGI. I know it’s a “not a bad complication to have to deal with” and that’s what I keep telling myself. The inheritance is actually quite substantial. We want to buy a house but have not had the time to find the one we want.</p>
<p>twiceblessed, If things don’t work out well, you may want to consider having your child take a gap year. By then, some of the inheritance will be invested in a primary residence (that may be looked at more favorably, depending on the school) and the rest will count as an asset instead of income.</p>
<p>^^^ I agree with the recommendation to take a gap year.</p>
<p>I understand that your kid is probably looking forward to starting school next year, but if an admission to a favorite school could be deferred for a year, you could likely save a lot on college tuition . . . and use some of that savings to help fund a pretty cool gap year adventure!</p>
<p>Although most schools will not act on it until a bit later in the spring, you can request a special circumstances review - some schools may remove the amount from income and just leave it as an asset. That is allowed through professional judgment (PJ) - there is no guarantee the school will do it, and one may while another won’t - but it is absolutely worth the hassle of pursuing with each school.</p>
<p>Yeah, this is a tricky one. Based on the info given by the OP, I think it’s is obvious that this money is really an asset and not income as far as it’s practical use goes - but if it’s income on taxes and FAFSA/CSS then that’s what it is until or unless individual college agrees it really isn’t. Will they? I’d guess most CSS schools will consider this a special circumstance and maybe not tag you for the entire amount (or any) as income but consider it an asset. This assumes it’s a one-time trust payment and not ongoing. As for FAFSA only schools? I have no idea how they’d handle it. I could be totally wrong on this, just using logical thinking and figuring CSS schools would do the same as they basically use their own formula/judgement in the first place.</p>
<p>One question I’ve always wondered about is this. Say this one-time income makes you full-pay for year one in kid’s college. Then, next year on the FAFSA/CSS you show your “true” income of $40k. Do colleges really change aid that much - say a need-based college that meets full need - can kids really go from full pay to almost $0 pay? What about less-generous colleges where $40k would still qualify for lots of need-based aid? Will they re-evaluate each year as if a brand new student or do they factor in that kids are “hooked” after a year or two and don’t want to leave so willing to scrape together more $$$ than an incoming freshman still deciding where to go to school?</p>
<p>I was interested to see if anyone can answer rundmc123’s question since we got hit with the one time lump sum backpay for our incoming freshman. </p>
<p>“Say this one-time income makes you full-pay for year one in kid’s college. Then, next year on the FAFSA/CSS you show your “true” income of $40k. Do colleges really change aid that much - say a need-based college that meets full need - can kids really go from full pay to almost $0 pay? What about less-generous colleges where $40k would still qualify for lots of need-based aid? Will they re-evaluate each year as if a brand new student or do they factor in that kids are “hooked” after a year or two and don’t want to leave so willing to scrape together more $$$ than an incoming freshman still deciding where to go to school?”</p>
<p>Is this a myth that we often hear or is it true? If we can somehow scrape together enough to make it through the first year, we were hoping that the following year would look at our normal income and make the adjustments. I have heard that it’s not often done so does anyone here know for sure or does it just depend on the school and each one is different?</p>
<p>We talked about a gap year too. Lots of people say it’s really great for the kid to have a break but then others say the kid gets “out of the groove” of school and more than a few don’t go back to school at all. Any studies? I noticed most of the elite universities allow and some encourage the gap year but most of our state schools don’t allow it at all unless for military duty.</p>
<p>No, what the CA schools don’t allow is deferral. Taking a gap year is fine, so long as the kid reapplies next year. (And CA schools do allow a kid one year off without losing eligibility for financial aid.) But whether or not it’s appropriate depends on the kid - if it’s high-performing kid who’s really gung ho about attending college next year, then maybe it’s not the thing to do.</p>
<p>OP - one trick with Roth IRA if your annual income exceeeded the limit was to contribute to a standard IRA then immediately roll it over to a Roth. I know Congress was talking about imposing limits on income for rollovers, but I don’t know if they ever closed this loophole.</p>
<p>Yes, that’s what I meant dodgersmom=a deferral. If ds doesn’t take a year off and we manage to pay for the first year, do you believe that most colleges will adjust his finaid package for the final 3 years? I’m afraid that rundmc123 might be right so if that’s the case, ds would need to take a gap year and reapply for the UCs or a deferral for whatever private colleges allow it. </p>
<p>I just can’t easily find the information about if finaid adjustments are usually made year to year or it’s a one time shot for all 4 years. I did see that most schools don’t require the css profile after the first year so that makes me wonder.</p>