Author Topic: FAFSA and Roth Pipeline Income Alternatives  (Read 18848 times)

johnny847

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Re: FAFSA and Roth Pipeline Income Alternatives
« Reply #50 on: July 02, 2015, 10:11:42 AM »
It's a bit outside the discussion of Fin. Aid, but for student living expenses, one thing I'm considering doing is buying a rental property my kids can live in while going to college (at least in the later years, they'd probably like the dorms early on). If it's a decent rental market, it could be lucrative to buy a place, kid stays in one room, and rent the other rooms out to roommates. Kid can keep somewhat of an eye on the place to make sure it doesn't get totally trashed, especially since they'd likely be living with friends. After college is done, the place can hopefully be sold at some level of profit (or continue to hold it if cash flow is good enough).

Obviously would have to run the numbers on any purchase, but you're generally assured a steady pool of renters in a college town, and you can be choosy such as only renting to more responsible grad students. Since it would be operated as a business, everything would be deductible, etc., and meanwhile your child has a place to live without having to move in and out every year. With a good purchase, the kid's rent could likely be covered by the other renters.
[Emphasis mine]

Based on my college experience, I think it would actually hinder the process of making friends if a student does not live in the dorms in his/her freshman year. But, I went to a university where nobody commuted to school and I don't expect this to apply to a school with a decent commuter population.

Be very careful about the tax implications of renting to your kid at below market rate (as in, free). http://www.rontaxcpa.com/showtip.php?newsid=139. It becomes a rental property which you're also using personally!
And the relevant IRS section on this: http://www.irs.gov/taxtopics/tc415.html

It would be incredibly easy for them to say that you're not charging your kid a fair rental price: your kid's roommates are being charged more than your kid.
Except your child could be on the house/mortgage to get you a lower rate on your mortgage (owner occupied and all that) plus if the child is taking care of the house as a live in property manager, you are allowed to charge less.  My old property manager got her entire rental "free" for managing the property.  One tenant on my current property gets a 10% discount for lawn care and general keep up.

But then wouldn't the child have to be the one reporting the rental income, not the parent?
No.  No more than my property manager has to report my rental income.  He does have to report the "income" of the discount though.

Ah so either the kid would have to report as income the fair market value of the rent, or it'd be considered a gift?
For the FAFSA it does not matter if the money is a gift or earned.  The child still has to claim it and it effects next years FAFSA.

I meant for taxes, not FAFSA.

teen persuasion

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Re: FAFSA and Roth Pipeline Income Alternatives
« Reply #51 on: September 18, 2015, 07:52:29 AM »
Kitces is reporting that the rules for the FAFSA are changing.  It will begin using prior-prior-year tax return numbers, rather than just prior-year.  Beginning with the 2017-2018 school year, the PPY figures will be used, and the application process will be moved back to October (rather than the current January).  This means that 2015 will be an important year for FAFSA purposes, it gets counted twice, for 2016-2017 (under the old rules) AND for 2017-2018 (under the new rules).

The shift to using an earlier tax year's info also means that everything for financial aid purposes is shifted one year earlier, and ends one year earlier.  IOW, half-way thru HS Sophomore year to halfway thru college Sophomore year.

https://www.kitces.com/blog/amended-fafsa-rules-to-allow-prior-prior-year-ppy-income-data-when-qualifying-for-financial-aid/

johnny847

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Re: FAFSA and Roth Pipeline Income Alternatives
« Reply #52 on: September 18, 2015, 08:32:00 AM »
Kitces is reporting that the rules for the FAFSA are changing.  It will begin using prior-prior-year tax return numbers, rather than just prior-year.  Beginning with the 2017-2018 school year, the PPY figures will be used, and the application process will be moved back to October (rather than the current January).  This means that 2015 will be an important year for FAFSA purposes, it gets counted twice, for 2016-2017 (under the old rules) AND for 2017-2018 (under the new rules).

The shift to using an earlier tax year's info also means that everything for financial aid purposes is shifted one year earlier, and ends one year earlier.  IOW, half-way thru HS Sophomore year to halfway thru college Sophomore year.

https://www.kitces.com/blog/amended-fafsa-rules-to-allow-prior-prior-year-ppy-income-data-when-qualifying-for-financial-aid/

Interesting development.

I found the headline to be misleading. It made it seem like you could choose to use prior prior year or prior year (this would lead to really interesting consequences...like doing some large Roth conversions every other year!)
However, this is not the case
Quote
On the other hand, it’s notable that once the new prior-prior year rules are adopted, they will be the law of the land and part of the standard process for all who complete the FAFSA. In other words, the transition to the new PPY rules is not optional, allowing you to choose (and cherry-pick) the prior year or the prior-prior year. Instead, the 2015 tax year will be used for the 2016-2017 school year (under the existing prior-year rules), the 2015 tax year will be used again for the 2017-2018 school year (under the new prior-prior year rules), and going forward thereafter every FAFSA will be completed using prior-prior year income.

Also, everybody who isn't already aware should take note of the Professional Judgement Review process, where if you know your income will be lower, you can get the EFC numbers recalculated
Quote
Of course, in situations where there is an extraordinary income change and current year income is known to be lower (e.g., because a family member just got laid off from work in the first few months of the year), the standard rules will still apply that allow for students to request a Professional Judgment Review (also known as the Financial Aid Appeal process for special circumstances). And in fact, Professional Judgment reviews may even become more common, as in the past there wasn’t much time for circumstances to change between the end of the prior tax year and the financial aid application process; now, there will be a 12+ month lag, which creates more possibilities for a significant change in family circumstances. At this point, though, the US Department of Education already doesn’t provide a great deal of guidance to financial aid administrators about how to evaluate Professional Judgment situations, and it’s possible that further guidance may have to be issued about how to handle what will likely be a higher volume of review scenarios.

teen persuasion

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Re: FAFSA and Roth Pipeline Income Alternatives
« Reply #53 on: September 18, 2015, 08:46:12 AM »
Following the link to the White House Fact Sheet, it says the President is pushing for Congress to change the FAFSA questions (currently set in law).

Quote
Calling on Congress to Simplify the FAFSA: Many of the most time-consuming questions on the FAFSA cannot be completed with IRS data because they require information that is not reported on tax returns. To answer those burdensome questions, students would have to collect information about assets, untaxed and other unusual forms of income from multiple sources – much of which financial aid eligible students lack. Because these questions are required by law, President Obama has renewed his call for Congress to further simplify the FAFSA by removing questions regarding savings, investments, and net worth, and eliminating, questions related to untaxed income and exclusions from income that are not reported to the IRS. In all, up to 30 burdensome and unnecessarily complex questions would be eliminated, shortening the FAFSA application substantially, and making it easier for students and families to access critical resources to pay for college.

emphasis added is mine

https://www.whitehouse.gov/the-press-office/2015/09/14/fact-sheet-president%E2%80%99s-plan-early-financial-aid-improving-college-choice

« Last Edit: September 18, 2015, 08:48:05 AM by teen persuasion »

DoubleDown

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Re: FAFSA and Roth Pipeline Income Alternatives
« Reply #54 on: September 18, 2015, 09:05:54 AM »
Thanks for posting the updated guidelines, very useful.

Anyone applying for financial aid who feels the paperwork does not accurately reflect their financial situation should pay close attention to the Professional Judgement Reviews or Appeals mentioned in the quoted parts above. This would be especially important for, say, a person retiring and reporting income in one year but now they have no earned income. But it can also be used for all kinds of other situations. In my case, for example, I had a calculated Family Contribution reduced from around $14,000 to $0 by appealing. The financial aid office was using my stepfather's income (filed jointly with my mother) to determine need, but he supported in me in no way. It made the difference between me having to drop out of college and getting full financial aid.

teen persuasion

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Re: FAFSA and Roth Pipeline Income Alternatives
« Reply #55 on: September 18, 2015, 10:29:45 AM »
The time shift makes grandparent 529s more useful - they can be used for the last 2.5 years without increasing the student's reported income.

http://www.forbes.com/sites/josephhurley/2015/09/17/fafsa-changes-make-grandparent-529-plans-even-better/

Quote
When filing the FAFSA, withdrawals from a 529 account owned by a grandparent—or any other non-parent—during the “base year” are considered untaxed income that must be added to the student’s adjusted gross income. A student’s base-year income is assessed heavily in the financial aid formula: as much as 50% of that income will be included in the student’s Expected Family Contribution or EFC.

In the future, grandparents will be able to tap their 529 accounts in the calendar year their grandchild enters his or her junior year of college without impacting financial-aid eligibility. Since that year typically includes the second semester of sophomore year, the grandparent will in most cases be able to pay for 2.5 years of a 4 year degree without causing a reduction in federal student aid.

seattlecyclone

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Re: FAFSA and Roth Pipeline Income Alternatives
« Reply #56 on: September 18, 2015, 03:37:03 PM »
Following the link to the White House Fact Sheet, it says the President is pushing for Congress to change the FAFSA questions (currently set in law).

Quote
Calling on Congress to Simplify the FAFSA: Many of the most time-consuming questions on the FAFSA cannot be completed with IRS data because they require information that is not reported on tax returns. To answer those burdensome questions, students would have to collect information about assets, untaxed and other unusual forms of income from multiple sources – much of which financial aid eligible students lack. Because these questions are required by law, President Obama has renewed his call for Congress to further simplify the FAFSA by removing questions regarding savings, investments, and net worth, and eliminating, questions related to untaxed income and exclusions from income that are not reported to the IRS. In all, up to 30 burdensome and unnecessarily complex questions would be eliminated, shortening the FAFSA application substantially, and making it easier for students and families to access critical resources to pay for college.

emphasis added is mine

https://www.whitehouse.gov/the-press-office/2015/09/14/fact-sheet-president%E2%80%99s-plan-early-financial-aid-improving-college-choice



Wow, that would be a big deal for FIREd folks if Congress actually passed it. Completely eliminating the asset tests for financial aid and relying only on income (like the ACA) would be a huge giveaway to those of us who plan to have a low income by choice.

teen persuasion

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Re: FAFSA and Roth Pipeline Income Alternatives
« Reply #57 on: September 18, 2015, 05:46:01 PM »
Following the link to the White House Fact Sheet, it says the President is pushing for Congress to change the FAFSA questions (currently set in law).

Quote
Calling on Congress to Simplify the FAFSA: Many of the most time-consuming questions on the FAFSA cannot be completed with IRS data because they require information that is not reported on tax returns. To answer those burdensome questions, students would have to collect information about assets, untaxed and other unusual forms of income from multiple sources – much of which financial aid eligible students lack. Because these questions are required by law, President Obama has renewed his call for Congress to further simplify the FAFSA by removing questions regarding savings, investments, and net worth, and eliminating, questions related to untaxed income and exclusions from income that are not reported to the IRS. In all, up to 30 burdensome and unnecessarily complex questions would be eliminated, shortening the FAFSA application substantially, and making it easier for students and families to access critical resources to pay for college.

emphasis added is mine

https://www.whitehouse.gov/the-press-office/2015/09/14/fact-sheet-president%E2%80%99s-plan-early-financial-aid-improving-college-choice



Wow, that would be a big deal for FIREd folks if Congress actually passed it. Completely eliminating the asset tests for financial aid and relying only on income (like the ACA) would be a huge giveaway to those of us who plan to have a low income by choice.

And not counting untaxed income (like Roth withdrawals)!   Those are currently added back, in effect double counted, making it problematic to use a Roth conversion ladder during college years.
« Last Edit: September 21, 2015, 01:06:35 PM by teen persuasion »

josh4trunks

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Re: FAFSA and Roth Pipeline Income Alternatives
« Reply #58 on: January 24, 2017, 11:36:52 PM »
Sorry for bumping an old thread but I wanted to clear up a question a few people were making wrong assumptions about.

You can use the same qualified educational cost for the AOTC / LLC and 'Education Exception to Additional Tax on Early IRA Distributions'. I called the IRS about this in 2014, they repeated the tax code on the phone, but I kept prodding them and what I got from the conversation was the IRA Exception does not look into how the costs were paid for (as long as it wasn't some tax free scholarship/grant).
The "No Double Benefit Allowed" section does not mention funds that are withdrawn penalty free, I assume because you are paying taxes on the money not getting a true benefit just an excuse to withdraw from your IRA early.
https://www.irs.gov/publications/p970/ch03.html

In my personal situation, I put money into a traditional IRA in 2014 for the 2013 tax year to get out of the 25%. Got married in 2014, my wife got into a 2nd degree nursing program shortly after. Withdrew the money January 2015 while in the 15% bracket, and also claimed the full LLC for her.
« Last Edit: January 24, 2017, 11:48:20 PM by josh4trunks »