So it’s been a few weeks since my last blog post. I apologize for the delay, but I have been busy with Spring Break, conferences, travel, and other meetings. Now that I’m back, though, let’s dive in to the calculation.
Now it’s time to begin part one of the breakdown of the individual formulas to determine your EFC, and we begin with parent contribution from income. Parental income is really the single largest source of your expected contribution, and serves as the foundation for our analysis of your families circumstances. What I will try to do here is address the core way in which the Federal Methodology treats parents’ income, and you can feel free to ask any questions which I will then answer for you about the methodology.
The contribution from parent income is broken into three different pieces:
- Determining the parents’ total income,
- Figuring out allowances against the income, and
- Subtracting the allowances from the total income to determine the available income.
I’ll tackle these one step at a time.
For the starting income figure, we take the parents’ adjusted gross income figure as reported on the bottom on the first page of the tax return (for simplicity, I will assume that we are talking about a family with two parents; at the end of this process I will do another post explaining the differences for divorced / separated families). Also keep in mind that tax returns have changed dramatically in 2018, but for the sake of this analysis, we are using 2017 returns (for the 2019-20 application year).
To the AGI, we add non-taxable income (which can include a wide variety of income sources – some are child support received, tax-deferred contributions to retirement programs, tax-exempt interest, etc). [For a more complete list, you may want to look at questions 94a to 94i on the FAFSA application for the appropriate sources].
Next we remove from parent income any items listed as income exclusions on questions 93a to 93f of the FAFSA (child support paid, combat pay, education tax credits, etc).
We add the AGI plus the non-taxable income and subtract the income exclusions to come up with the total income.
Now on to allowances against income. There are five main areas:
- US Income Tax Paid – we use the actual income tax paid by your parents as reported on the FAFSA, and as documented by the copy of your tax return,
- State Taxes Paid – for this calculation, we use a table to determine how much of your Total Income should be protected to cover state and local taxes,
- FICA or Social Security Taxes – again, for this line we allow a deduction based on a formula against wages earned from any employment to cover taxes paid to the Social Security system,
- Employment allowance – for families where both parents are working (or, in a single parent household, where the parent is working) a deduction to allow for the cost of having no one at home (based on a formula and capped at a very low value), and
- Income Protection Allowance (IPA) – this is meant to be an offset to protect families with particularly low income to protect the entirety of their income before any contribution is expected (even in part) from them.
The difference between total income and total allowances is set aside as Available Income (we will come back to this number later).
So, lots of information, and I’m sure this will generate many questions, so ask away!