FAFSA: Is it Income?

Jul 30

The FAFSA now uses income from your tax return only. But "income" isn't just your wages or your Adjusted Gross Income. It's all the income on your tax return, whether you pay taxes on it or not. Good news: starting with the 2024-25 school year, the FAFSA no longer considers income that isn't on your tax return, such as payroll deductions, though the CSS Profile still does.

When you file the FAFSA, your tax return data will be transferred directly from the IRS. (You can save yourself tons of hassle by just doing this rather than submitting your info manually, since the latter virtually guarantees an audit.)

Since the FAFSA is pulling your tax return data, that means it's not using current data. Instead, it's prior-prior year data. This means that when you file in fall of 2024 for the 2025-26 school year, you're using 2023's tax return. This also means that if you've filed an extension for your taxes, you'll need to wait until your taxes are filed before you can file the FAFSA.

Big picture: the FAFSA takes your total income from your tax return-- taxable and untaxed-- then subtracts actual federal taxes paid and an allowance for FICA taxes, subtracts an income protection allowance based on your family size, and calls that "Available Income." So, what goes into total income? Here's a quick list:

W-2 Income: Yes, although you can ignore your W-2s to file your taxes since only what's reported on your tax return will count.
Pre-tax contributions to IRAs: YES, these are income since they are listed on your tax return.
Roth or other non-deductible retirement contributions: NO, these do not get added back because they're already included in your taxable income.
Roth IRA or other nontaxable distributions from retirement accounts: YES, these are income that shows up on your tax return and must be reported! This is one of many reasons not to use a Roth IRA as your college savings vehicle.
Pre-tax salary deferrals to 401(k)s, 403bs, and other employer retirement plans: NO, these are not income on the FAFSA but they are on the CSS Profile! You do not have to add income not reported on your tax return to the FAFSA any longer; however, you do have to add it to the CSS Profile.
Pre-tax contributions to self-employed retirement plans such as individual 401ks, SEP IRAs or SIMPLE IRAs: YES, if these are reported on your tax return they are added to income (see Schedule 1 if you're not sure).
HSA contributions: As long as they go through payroll, they are not added back. However, if you make a payment to your HSA directly, this is deducted on your tax return and is added back.
Education tax credits (AOTC and LLC): These are reported on the FAFSA so that federal taxes paid can be adjusted so you are not penalized on the FAFSA for having claimed an education tax credit.
Work Study earnings: NO, these are not income! On your FAFSA you will be asked for work-study earnings so that these can be subtracted from your income.
Non-taxable rollovers between 401ks and/or IRAs: NO, not income. However, if the rollover is reported on your tax return (check line 4a) you'll need to manually subtract it.
Qualified distributions from the parent's 529: NO, not income! This is one of many reasons to use a 529 as your college savings vehicle.
Child support received: NO, it's not income! Instead child support received is reported as an asset.
Housing or living allowances for military or clergy: YES, it's income! Unless the military allowance is for on-base living.
Untaxed disability benefits including veterans noneducational benefits: YES, it's income!
Dividends and interest earned in a non-retirement investment or savings account, including tax-free interest: YES, it's income!
Untaxed Social Security benefits: NO, it's not income! Including if the student received it.
Roth conversions: YES, it's income! Unless it's a backdoor Roth conversion which is nontaxable and considered a rollover.
Nonqualified withdrawals from a 529: YES, it's income! Plus you pay a penalty. If you're distributing excess to a child who's no longer a student, make sure it's distributed to them, not the parent, so it doesn't need to be reported.
Taxable transactions in an UTMA or UGMA account: YES, it's income to the student! However, if the purpose of the transaction is to transfer the UTMA/UGMA account to a custodian 529, as long as the gain realized through sale of the assets in the account keeps the student below the student income protection allowance (about $9,500 on this year's FAFSA) it's still worth doing.

And with all of this, remember that income is based on the tax year used in the FAFSA. When you file the FAFSA in fall of 2024, you'll use 2023's tax return. Any such income received in 2024 will be reported on next year's FAFSA.

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