EITC and Auto 0 EFC FAFSA qualification with dividend-free investing

[NoFacialHair]

Hey all, I only recently discovered MMM but have been planning for FIRE for a long time, currently targeting 2020 when I will hand over the income-generating reins to my DW who is excited about launching a career after decades of being a (highly educated) SAHM raising our kiddos.  She recently secured a teaching position at a boarding school which doesn't pay great, but comes with added benefit of free room and board for the family.  We are planning on taking advantage of that by selling our house and moving onto campus within the next year or two.  We are down to two kiddos left in the house, both in middle school, and it occurred to me that downscaled income/expenses and simplified tax returns come 2021 is pretty good timing for FAFSA and our last round of college tuition years.  DW's relatively low income sets us up well for meeting the <$24k AGI requirement for Auto 0 EFC qualifications, which also happens to be right around the sweet spot for EITC payouts.  My biggest concern is taxable investments getting in the way with the dividends/passive income they generate.  With the equity from the sale of our home, come 2020 I anticipate having ~$800k in taxable investments, currently spread across a broad range of ETFs, mutual funds, and a handful of individual stocks.  I am strongly considering selling those investments and replacing them with Berkshire BRK.A/B to eliminate dividends during our EITC/FAFSA years.  It will come at the cost of realizing ~$150k in capital gains which I'll spread over the next 3 years to stay at the 15% LTCG tax rate.  I don't anticipate needing to sell any of the newly acquired dividend-free investments while the kiddos are in college as we will have plenty stashed away in 529 accounts. 

Has anyone else looked into such strategies?  Is this a dumb idea?  This seems like a perfectly legit way to pad the stash further during FIRE w/kids with ~$5k/yr in EITC and $6k/yr/kid in Pell Grants.

[secondcor521]

I have.

Note that AGI is not the only qualification to get an Auto 0 EFC.  The additional qualification can be met in three ways, see https://www.edvisors.com/fafsa/eligibility/simplified-needs-test/

For me it is pretty challenging to be able to file a 1040A or 1040EZ.  Avoiding dividends by owning BRKx helps, but in my case there are other things that trip me up.  I'd suggest sitting down with the tax forms and seeing what things you reported on your 1040 this year and see what other modifications you may need to make in order to get the Auto 0 EFC.

There are also the other two bullet options listed that you may choose to look into.

Good luck!

[NoFacialHair]

Thank you for responding, 2Cor521, and for the reminder of the 1040A or 1040EZ filing requirement (I am not intending to qualify via the other two options).  Today, we file 1040 for taxable income in excess of $100k, Schedule A itemized deductions, and DW's Schedule C business.  High income will no longer be an issue when I leave the workforce (hence, the Auto-0 EFC pursuit), and we intend to close the business by 2020 which has never been very profitable anyways.  Between state income taxes, property taxes, mortgage interest, and charitable giving, our itemized deductions today are about 2.5x the standard deduction.  Selling our house eliminates two of the four elements (with the exception of minor property taxes for vehicles), and I anticipate 0 state income taxes at <$24k AGI.  Charitable giving will drop commensurate with reduced income, so we will be winners with the standard deduction. I'm seeing a Foreign Tax Credit that we take on our 1040 as well, but it is under $100, and I'm guessing goes away when we liquidate current investments and move into BRK.

I'm not seeing any other obstacles to filing 1040A, but would greatly appreciate having other considerations pointed out I may have missed.

[teen persuasion]

HSA is our biggest impediment to not filing 1040.  As far as I can see, either contributing or withdrawing from our HSA triggers need to file 1040.

 I'm still looking for a new way to qualify - in the past we qualified for free/reduced lunches, when we were a family of 7 at home.  Our income has increased while the kids have gone off to college, one by one, reducing our family size.  The advantage of qualifying due to free/reduced lunches is that it can be used to qualify for up to 3 years based on the way the FAFSA asks about years received.  I.e., we last had reduced lunch DS4's senior year, 2015-16.  The FAFSA for his freshman college year asked if we qualified in 2014 or 2015.  Yep.  Next FAFSA asks for 2015/2016. Yep.  Next year asks for 2016/2017.  Yep.  So only his 4th year FAFSA won't be eligible.

 Actually, we can't qualify for the auto EFC=0 anymore, since they retroactively raised the AGI level from $32k to $23 a few years ago.  We have qualified for the Simplified Needs Test to ignore assets, though.  Until recently, though, we've hit zero or close to zero EFC through calculations instead.  This is getting harder now, though.  DS2 was considered in family size for FAFSA purposes until he hit age 24 this year.  DD3 may attend grad school, knocking her off our family size for FAFSA as well.  So we'll drop from family size 6 to 4 in quick succession, as our gross income creeps up (lots more going to retirement, but gets added back to "available income").

I'm most concerned for DS5 - he will appear to be an only child, just as our income peaks after years of undersaving on a low income raising 5 kids.  I'm running the numbers on getting to FIRE just as we hit the tax year for his first FAFSA.  Health insurance is the big unknown.  He graduates 2023, so file FAFSA Oct 2022 with 2021 tax return.  Another option is DH retires and I keep on at my part-time job, but again health insurance is the issue (I have no benefits).  I keep watching how the FAFSA rules evolve

[secondcor521]

I'm not seeing any other obstacles to filing 1040A, but would greatly appreciate having other considerations pointed out I may have missed.

IIRC, the one that would have tripped me up in 2016 is jury duty, which is taxed as other income (even if you donate it back to the jury pool), which necessitates 1040 line 21.  Asking for a deferral to the following year might work.

Another one is income from a side gig, which, depending on circumstances, either requires schedules C and SE or 1040 line 21.

[NoFacialHair]

Thank you TP for the heads up on HSAs.  I don't currently have a high deductible health plan through my employer, hence no HSA.  I will have to look into what the future holds when our health coverage comes through DW's employment, but vaguely recall an HMO option priced reasonably close to what I'm getting through megacorp.  I'm guessing we won't have an HSA after I retire either.   

I thought I had a large family with 5 kids.  You win. :)

And thank you (again) 2Cor521 for the heads up on jury duty (and side gigs, but I intend to remain firmly unemployed).  It seems like a low probability issue, but something to look into.  I was summoned last year and made it into the courtroom, only to be sent home at the last cut after 6 hrs.  I don't recall there being anything special about how my jury duty pay was handled, it just showed up on my W2 from megacorp along with the rest of my earnings for the year.  I gather this isn't how every employer handles it?

So far, I'm not seeing major holes in my plan to meet EITC/FAFSA eligibility when my kids hit their college years.  I'm getting pretty excited. :)

[secondcor521]

Regarding jury duty pay -

Employers sometimes have "jury duty pay" as part of their benefits package; it sounds like this is what you're talking about.

In my county, the court itself pays people for serving on the jury, regardless of what an employer does.  They pay something quite modest, like $15 per day plus 59 cents a mile for mileage to/from the courthouse.  I think I got paid a total of $18 which I had to put on my tax return for 2016.

If you want to be super cautious, it might not be a bad idea to look at what "other income" sources are (1040 instructions for line 21) so you can be sure to avoid/decline them when the time comes.

Good luck!

[NoFacialHair]

After doing a little homework, the biggest potential Line 21 concern for me would be taxable distributions from 529 plans.  Anticipating ~$250k in the accounts by the time college years roll around, I doubt that will cover two college educations in full.  If there is any overage, I would either transfer to a grandchild or wait until our EITC/FAFSA years are over to make a taxable distro.

[sol]

My accountant/spouse says that we can't file a 1040A because we have rental properties, and because we itemize in order to utilize the mortgage interest and charity deductions. 

[NoFacialHair]

Yup, this strategy definitely isn't for everyone.  You really need to have a simplified finance/tax situation to pull it off.  Lucky for me, life is going to get a lot simpler over the next few years.

[seattlecyclone]

Yeah, lots of ways to become ineligible for the 1040A, even things like jury duty that you can't necessarily plan around.

Seems like a backup plan could be to apply for free/reduced lunch when your kid is in high school and then just not use the lunch benefit if you believe that would be unethical. I don't know whether the standards for that are the same everywhere, but around here all you need to do is show you have an AGI under $37k for a family of three.

[Laura Ingalls]

We have the FAFSA thing figured out by free and reduced lunch.  We are not likely to ever have a 1040EZ.

The EITC has been harder.  We thought we had this year on target but we had a stock in a taxable account release a special dividend and we are officially screwed on the unearned income part for the third year running.

[teen persuasion]

After doing a little homework, the biggest potential Line 21 concern for me would be taxable distributions from 529 plans.  Anticipating ~$250k in the accounts by the time college years roll around, I doubt that will cover two college educations in full.  If there is any overage, I would either transfer to a grandchild or wait until our EITC/FAFSA years are over to make a taxable distro.

If you expect to be eligible for EFC = 0, why would you need $250k in 529s?

Regarding eligibility for free/reduced lunches - total GROSS income is used, not AGI.  They want to know your total salary before any deductions and any cash income (like withdrawals from savings), so mustachians maxing HSA  accounts and 401ks and IRAs aren't low enough in income, unless you have a large family.  Once we dropped below 5 family members, we were ineligible.

[NoFacialHair]

If you expect to be eligible for EFC = 0, why would you need $250k in 529s?

State schools (at least mine) don't meet full EFC 0 need and private schools that requires CSS PROFILE will consider my assets for determining aid from the institution.  I have no idea which kind of schools my kids will end up at, but in either case, all I'm really expecting are max Pell Grants and potentially subsidized student loans.

Regarding eligibility for free/reduced lunches - total GROSS income is used, not AGI.  They want to know your total salary before any deductions and any cash income (like withdrawals from savings), so mustachians maxing HSA  accounts and 401ks and IRAs aren't low enough in income, unless you have a large family.  Once we dropped below 5 family members, we were ineligible.

Thanks for clarifying.  Sounds like this isn't an option for us then.

[SuperSecretName]

Very curiously following.