Some families are fortunate to have grandparents who are willing and able to assist with the cost of their grandchildren’s college expenses. There are many ways to provide assistance. Which options are better for a specific family depend on several factors. Some of the ways that grandparents can subsidize educational expense include direct payment of tuition to the institution. Such payments are not considered gifts which apply toward the annual exclusion for Gift and Estate tax purposes and thus may be in addition to annual $14,000 transfers. If a senior is feeling very generous, $14,000 gift transfers may be of appreciated securities to a grandchild, in a lower tax bracket than the donor, and may reduce the sting of income tax upon the liquidation of the investment. Funding a 529 college savings account in their own name, a child’s name or the grandchild student’s name is an option when the student is young and the funds have time to grow before the student begins college.
If the grandchild/student is a potential recipient of federal financial aid, timing must be considered as well. For example, when distributions are made from a grandparent-owned 529 plan they are treated as income of the student for financial aid purposes. Likewise, a gift of securities which are subsequently sold will still show up on the FAFSA. Recognizing when they will show up may be helpful if the student is otherwise eligible for government financial assistance. Under recent changes to the financial aid rules, we must now consider the timing of payments in connection with the “prior-prior year” (PPY) rule.
In September 2015, President Obama changed the filing format of the FAFSA college aid form from using prior year income to “prior-prior year” income, making parents’ 2015 income more important than ever and creating more confusion as to how the rule works, how it will impact aid eligibility and when to file what to whom. Students who are presently high school seniors (Fall 2016) will be able to apply for financial aid for their freshman (academic) year of college in 2017-2018 by submitting the FAFSA as early as October 2016 using income tax information from their parents’ 2015 tax returns.
This means that parents with high school seniors, college freshmen and college sophomores today will complete the financial aid form for next year using 2015 income, and next Fall, when they apply for aid for the following academic year the parent’s 2015 income will be used AGAIN – TWO YEARS IN A ROW.
Here’s a summary of key dates for submitting the FAFSA depending on when you plan to go to school:
Table from StudentAid.gov/fafsa
Families can now start filling out the Free Application for Federal Student Aid (FAFSA) starting October 1, rather than January 1 as in previous years.
Does this affect my family? Do I make too much money to bother filling out a FAFSA form? This blogger could not find a clear answer to this question. What she did find was a form and instructions complex enough to rival preparing an income tax return. If you think that your student might be eligible and want to take a stab at the FAFSA be sure to consider using the IRS Data Retrieval Tool (IRS DRT). Here’s how the IRS DRT process works:
- Log in to your current FAFSA, or start a new FAFSA at fafsa.ed.gov/.
- In the finances section of the FAFSA, you will see a “Link to IRS” button if you are eligible to use the IRS DRT.
- Click the “Link to IRS” button and log in to the IRS to retrieve your tax return information.
- Review your tax return information, and see the tax data that will be transferred into your FAFSA.
- Check the “Transfer My Tax Information into the FAFSA” box, and click the “Transfer Now” button.
- Review your federal tax return information that has been transferred into the data fields on your FAFSA. 3. When you return to the FAFSA, you’ll see that questions that are populated with tax information will be marked with “Transferred from the IRS.” Don’t make any changes to those answers (except where Individual Retirement Account or pension rollovers are involved), or you’ll invalidate the information you retrieved.
If you are a client of The Glenview Trust Company and have questions about this topic or other planning concerns, let us hear from you.