College application season is underway. As high school seniors agonize over those all-important college essays, parents across the country are facing their own paperwork challenge: the Free Application for Federal Student Aid (FAFSA).
KEY POINT: The FAFSA application is not just for families that expect to qualify for federal assistance. It’s also used to apply for state aid, and colleges and universities typically require the FAFSA to apply for institutional student aid.
Taxes and the FAFSA
The FAFSA requires a plethora of information from the prospective college student — and from their parents if the student is a dependent.
KEY POINT: Dependent student status is not the same as dependency status for tax purposes. For the 2021–2022 academic year, a prospective student will be considered a dependent if they were born on or after Jan. 1, 1998, unless certain exceptions apply. These include, for example, if the child is married, working toward a master’s or doctorate degree, or currently serving in the military.
Assuming a child is a dependent student, the FAFSA requires identifying and financial information from the student and parent. This information includes information on savings, investments, and untaxed income, as well as all-important tax data.
Tax data change
Historically, the FAFSA form required information from the immediate prior tax year. However, for the 2021–2022 FAFSA, parents and students will need to enter tax data from their 2019 returns. This switch to reporting tax information from an earlier tax year makes it easier for parents and students to complete the form, since the required returns will have already been filed. In fact, tax information can be input directly into the FAFSA form using a handy IRS tool.
The IRS Data Retrieval Tool (DRT) can import tax information into the online FAFSA form directly from the tax returns on file with the IRS. The imported information will not show up on the FAFSA form; instead, “Transferred from the IRS” will appear in the appropriate fields.
The Department of Education (DOE) cautions, however, that not everyone can use the data retrieval tool. This may be the case, for example, if either parents or students did not file a 2019 return because their income was below the filing threshold or filed an amended return for 2019.
Automatic inputting of tax information also won’t work if the marital status of a student’s parents has changed since the 2019 return was filed. The DOE offers these instructions:
- If parents filed a joint tax return for 2019, but are no longer married, only tax return information for the custodial parent should be reported on the FAFSA. Tax information for the other parent must be subtracted before filling out the FAFSA.
- If the custodial parent did not file a joint return for 2019, but is married when the FAFSA is filled out, tax information for the parent’s new spouse must be added to correctly complete the form.
- If parents filed a joint return for 2019, but the custodial parent is married to a different person when the FAFSA is filled out, tax information for the former spouse must be subtracted, and tax information for the current spouse must be added to complete the form.
- If the custodial parent became widowed since filing a joint 2019 return, tax information for the deceased spouse must be subtracted to complete the form.
The DOE cautions that filers cannot use more recent tax information when filling out the FAFSA form. So, parents and students filling out the 2021–2022 FAFSA cannot use information from their 2020 tax returns — even if their financial situations have changed since 2019. The DOE says that filers who have experienced a reduction in income since tax year 2019 should complete the FAFSA with the required 2019 information, and then contact each of the schools to which the student is applying to explain and document the change in income.
You can help your clients in these situations calculate the necessary tax data, and prepare any explanations and documentary information.