A MESSAGE From Chris Everett
President, Everett Wealth Solutions
The US Department of Education is making changes to the FAFSA, again. In some cases it's a non-event. In others, it could mean losing need based financial aid.
OLD FAFSA RULES: If you have a student heading off to college in 2017 and you made or are about to make some financial planning moves in 2015, it's possible that some of those strategies could impact your 2015 Tax Return. Under the old rules, FAFSA would have wanted to see your 2016 Tax Return not 2015. Therefore, your strategic move would have been successful and legal.
NEW FAFSA RULES: If by now you have already made some strategic financial moves that impact the 2015 Tax Return, it's probably too late to undo any move you've made. Therefore, the Tax Return will tell the story of what you did for school year 2017.
Here's An Example
You have a mutual fund worth $75,000 that grew from an initial deposit of $65,000. You have a $10,000 capital gain. If the $75,000 was legally redirected into a non-countable asset in 2015, you can no longer shelter that move from discussion and lower your expected family contribution (EFC) by $4,230.
The FAFSA and the colleges will see this capital gain in 2015 now. You decide to liquidate the mutual fund before learning about the new FAFSA Rule. You pay the one-time capital gain tax of $1,500 ($2,000 if you are in a higher tax bracket.) With the capital gain exposed, the college will very likely ask what you did with the $75,000.
It could be worse. Let's say the $75,000 was in a student asset like an UTMA (uniform gift to minors account). The $75,000 exposed asset will increase your EFC by $15,000. So as you can see, for those of you with a student heading off to college in 2017, if you have not done any planning yet, it is advisable to get the counsel of a fiduciary advisor to help you look at your options.
The Bottom Line
Start your college financial planning as early as possible. For the best result start long before your student enters their freshman year in high school.
from the U.S. Dept of Education
On Sept. 14, 2015, President Obama announced significant changes to the Free Application for Federal Student Aid (FAFSA®) process that will impact millions of students. Starting next year, students will be able to do the following:
Submit a FAFSA® Earlier
Students will be able to file a 2017–18 FAFSA as early as Oct. 1, 2016, rather than beginning on Jan. 1, 2017. The earlier submission date will be a permanent change, enabling students to complete and submit a FAFSA as early as October 1 every year. (There is NO CHANGE to the 2016–17 schedule, when the FAFSA will become available January 1 as in previous years.)
Use Earlier Income Information
Beginning with the 2017–18 FAFSA, students will report income information from an earlier tax year. For example, on the 2017–18 FAFSA, students (and parents, as appropriate) will report their 2015 income information, rather than their 2016 income information. The following table provides a summary of key dates for the transition to using the early FAFSA submission timeframe and earlier tax information.