By Justin E. Bryan, CPA
The cumbersome and often tedious process of filling out the Free Application for Federal Student Aid (FAFSA) may have just gotten a little easier. Last year the Department of Education announced individuals would be able to start filing as early as October 1 and are able to use data from the prior year. The changes will go into effect this year, starting with the 2017-18 FAFSA.
Here is what you need to know.
Individuals originally had to wait until after January 1 to file their FAFSA and had to use current year data, which was usually an estimate since that year’s tax return would typically not have been filed yet. To make things even harder, applicants who used estimates would have to update their information once the final numbers were received, often months later.
No More Estimations
Under the new policy, individuals will no longer have to rely on estimated figures to fill out the FAFSA. Since the prior year tax returns will already be complete, you can use the IRS Data Retrieval Tool to automatically import tax information into the FAFSA. These changes will also allow people who extend their tax return to use final information without having to update the form at a later date.
The ability to use data from the prior year can be an advantage for families whose income has increased in the current year, but may have a negative impact on those whose income has decreased since the prior year. If there is a large change in income between years, it is best to contact each school’s financial aid office directly and let them know.
Time to Plan
For those that have the option and flexibility in recognizing income, there are significant tax planning opportunities available. Individuals who can defer recognizing income until the second semester of the student’s sophomore year would not be required to report that income on the FAFSA.
Below is a timeframe of the changes and what tax information to use when applying.
|Planning to Attend College From||Submit FAFSA for||Use Income & Tax Info From|
|July 1, 2017 – June 30, 2018||2017 – 18||2015|
|July 1, 2018 – June 30, 2019||2018 – 19||2016|
|July 1, 2019 – June 30, 2020||2019 – 20||2017|
What about the Grandparents?
There is a similar effect on 529 plan distributions from plans owned by grandparents. Typically, when a grandparent initiates a distribution from the plan, it is considered untaxed student income. This untaxed income is assessed at a rate of 50% and included in the student’s financial aid income calculation.
Under the new rules, grandparents can now initiate distributions beginning in the second semester of the student’s sophomore year without having any adverse financial aid consequences. Again, this only applies to distributions from plans owned by grandparents. Distributions from plans owned by parents are treated completely differently.
The Final Word
While there are other nuances to the new rules, the biggest implications to remember are:
- Individuals can now start filing on October 1, 2016 for the 2017 – 18 FAFSA
- No need to estimate income. You can now use the previous year’s income and tax information.
As a whole, these changes should have a positive impact on most families and, hopefully, alleviate some stress when filling out the FAFSA. However, with any new regulation or rule, the best thing to do is plan ahead by meeting with your advisor. No two situations are ever exactly alike and at YHB we will make sure you receive expert advice with real solutions tailored to your unique situation.
Justin joined YHB in January 2014 after graduating from Shepherd University in 2013 with a Bachlor’s degree in Accounting with a concentration in financial planning. He became a certified public accountant in 2015. Since joining the firm Justin has specialized in tax and consulting services for individuals and businesses while supporting the YHB Healthcare Team.