How Do You Calculate Individual Income From a Joint Return for the FAFSA When the Parents Are Separated?

How Do You Calculate Individual Income From a Joint Return for the FAFSA When the Parents Are Separated?

In your answer to How Does Income Tax Filing Status Affect Student Aid?,

you address the question of which parent is responsible for completing

the FAFSA. However, I’m very curious as to how the filing status of

separated parents affects how the FAFSA is processed, once the

primary/custodial parent has completed it. That is, is it more

advantageous for separated parents to change their filing status to

“married filing separately” so that the FAFSA only shows the income of

the one parent who completed it? It seems like it would be in the

parents’ and student’s best interest for the parent to have an income

tax filing status that demonstrates a greater need.

— Brad R.

Marital status on the FAFSA does not necessarily have to match marital

status on the federal income tax returns. There is a little play in

the joints that can lead to one status on the federal income tax

return and another status on the FAFSA. The most common circumstances

in which one might file a federal income tax return as married but the

FAFSA as separated include:

1. The parents have an informal separation but not a legal separation

or divorce. During an informal separation the parents may not live

together and must maintain separate residences. If the parents have

an informal separation they must still file their federal income

tax returns as married (either as married filing jointly or as

married filing separately) but file the FAFSA as separated.

2. The parents were married on the last day of the tax year, but

became divorced or separated between then and the FAFSA application

date. In such a circumstance the parents would file federal income

tax returns as married (either as married filing jointly or as

married filing separately) but would file the FAFSA as divorced or

separated, as appropriate.

Note that if the parents are divorced or have a legal separation as of

the last day of the tax year they cannot file federal income tax

returns as though they were married. Using the incorrect federal

income tax filing status in this situation is a fairly common

error. If the FAFSA is selected for verification and the college

financial aid administrator discovers that the wrong tax filing status

was used, this is considered conflicting information. The financial

aid administrator is precluded from disbursing student financial aid

funds until the conflicting information is resolved. Resolving the

conflicting information may include requiring the family to file

amended income tax returns if they wish to receive federal student

aid.

If the parents are separated, only the income and assets of the

custodial parent are reported on the FAFSA, regardless of the tax

filing status of the parents. If the custodial parent files a return

with a status of married filing separately, identifying her adjusted

gross income (AGI) from the income tax return is easy. On the other

hand, if the parents filed a joint return, the custodial parent must

calculate her income and taxes paid using information from the joint

return and the relevant IRS W-2 and 1099 forms. The income calculation

is based on the income from the custodial parent’s W-2 forms, plus

half of the income (or losses) from joint accounts and investments.

There are two approaches to calculating the taxes paid attributable to

the custodial parent from a joint return. The preferred method is to

use the IRS Tax Table or Tax Rate Schedule to calculate the amount

that would have been paid if a separate return had been filed,

assuming the appropriate deduction and number of exemptions. The other

method involves a proportional distribution of the taxes paid on the

joint return based on the custodial parent’s share of the joint AGI.

The bottom line is that the income should be the same regardless of

whether a joint or separate return was filed. The taxes paid may

differ slightly, depending on the method used to calculate the split,

but this usually has a negligible impact on the expected family

contribution as calculated by the FAFSA.

The main benefit of filing a separate return, if that is an option, is

that a separate return simplifies the income and tax calculations. It

also avoids some headaches, such as might occur if the FAFSA is

selected for verification. But filing separate returns precludes the

taxpayer from claiming certain education tax benefits, such as the

Hope Scholarship tax credit, Lifetime Learning tax credit, Tuition and

Fees Deduction, Student Loan Interest Deduction, and the exclusion

from income of interest in connection with the education bond program

(i.e., certain Series EE and I bonds).

Source: Fastweb

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