Two major changes to the Free Application for Federal Student Aid (FAFSA) will take effect for the 2017-2018 school year that runs from July 1, 2017 through June 30, 2018.
Many persons are aware of the change that will allow the filing of the FAFSA form as early as October 1 of the previous year instead of January 1 of the upcoming school year. However, many are unaware of the new income information requirements.
For a student attending college during the period from July 1, 2016 through June 30, 2017, the rules are the same as in prior years. The FAFSA application can be submitted starting January 1, 2016 through June 30, 2017. The income that will be reported on the FAFSA application will be for the 2015 tax year.
For a student attending college starting July 1, 2017 through June 30, 2018, the income that will be reported on the FAFSA application will also be for the 2015 tax year. Some have referred to this as the “prior prior year” (PPY) income test. The FAFSA application can be submitted starting Oct 1, 2016 through June 30, 2018.
For a student attending college in a school year that begins July 1, 2018 through June 30, 2019, the application can be submitted for the period beginning October 1, 2017 through June 30, 2019, and the income that will be reported will be for the 2016 tax year. The year prior to 2018 is 2017; and the year prior to the prior year of 2017 is 2016.
The new application timelines means that students and parents will not need to estimate their incomes since their prior year’s tax returns likely had yet been filed by the January 1 filing date under the old rules. Under the current years, the year prior to the prior year will be used.
The significance of the new PPY rules is that it changes which tax years are relevant when looking at college funding strategies. Under the “old rules”, the relevant time window extended from the middle of the junior year in high school, until the middle of the junior year of college. Under the new rules, tax events a late as the second half of the sophomore year in high school through the middle of the sophomore year of college are relevant for FAFSA aid. In our October 7, 2014 blog posting, we discussed how to use grandparents’ 529 plans most effectively but using those monies to pay for the senior year of college. Due to the PPY rules, those funds can now be used one year earlier to pay for college. The timing of when to use the student’s, parents’ and grandparents’ 529 monies and other assets to pay for qualified college expenses is critical so as not to impair the student’s ability to qualify for financial aid and maximize the aid received. As a general rule, most college financial planners recommend that the student’s assets be used first and then those of the parents.
The IRS Data Retrieval Tool (DRT) allows applicants (and their parents, if applicable) to access the IRS tax return information needed to complete the FAFSA, and transfer the required information directly into the FAFSA from the IRS. The FAFSA includes a link to the IRS if an applicant is eligible to use the IRS DRT.
If you want to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.