Heads up, the T(r)ails of Verification (part 2)

Let’s face it. Verification isn’t fun. When you are selected for verification, it can feel like a burden, and it may feel like those of us who are working in financial aid are trying to “get into your business”. Trust moneyman, it isn’t our choice. If you are selected for verification it might feel like the flip of a coin at random (heads or tails?), but once you have been selected there are certain principles we need to follow.

Flip a coin… See where it lands…

One of these principles is that while financial aid officers are not accountants, we do need to know some basic tax information. Federal Student Aid publishes an annual Application and Verification Guide for financial aid administrators (which is very technical, feel free to read it if you have nothing better to do) which perhaps says it best:

Financial aid administrators do not need to be tax experts, yet there are some issues that even a layperson with basic tax law information can evaluate. Because conflicting data often involve such information, FAAs must have a fundamental understanding of relevant tax issues that can considerably affect the need analysis. You are obligated to know (1) whether a person was required to file a tax return and (2) what the correct filing status for a person should be.

Page 132 of the 2020-21 AVG

So here we go. Let’s start with Heads… In this case, Heads of Household.

If moneyman sees one common mistake that holds up families from completing verification, it is both parents filing their tax returns as head of household even though they are married and living together. The rules for filing Head of Household (as published by the IRS) say:

“You may be able to file as head of household if you meet all the following requirements:

  1. You are unmarried or “considered unmarried” on the last day of the year…
  2. You paid more than half of the cost of keeping up a home for the year.
  3. A qualifying person lived with you in the home for more than half the year (except for temporary absences, such as school). However, if the qualifying person is your dependent parent, he or she doesn’t have to live with you. See Special rule for parent, later, under Qualifying Person.”

If two parents file as married on the FAFSA as their marital status and then provide separate tax returns with one or both filing as Head of Household, this is usually a problem. To correct this, the family either needs to prove that they meet the qualifications above, or they need to file an Amended Tax Return. Otherwise we cannot complete verification.

Why would a family want to file as Head of Household? Usually tax rates are lower, so amending a return may mean that the family needs to pay more in taxes, but to qualify for aid it is necessary to resolve this discrepancy. There could be a possible reason for a parent to file Head of Household on a tax return (say for the 2018 tax return), but file the FAFSA as “married” for 2020-21, but the situation is unlikely. Lots of examples (and much more detail) can be found at this link.

More T(r)ials (or trials) of verification:

The quote above also mentions that financial aid administrators should kow if a parent or student should have filed a tax return (if they earned enough income to be required to do so).

How does this work? The same IRS publication lists the minimum income thresholds which require a taxpayer to file a Federal income tax return.

According to the chart, if a regularly employed (not self-employed) individual earns above 12,000 (and they are single and under 65), they must file a tax return. Of course, a taxpayer might choose to file anyway so that they can get their tax refund, but the above chart represents the numbers of income at which you must file a return. Note (by the way) that spouses who file separately have a very low income threshold – only $5.

Self-employed individuals have even a lower threshold. If you are self-employed and your net earnings are greater than $400, you need to complete a tax return.

Sometimes we hear from students whose parents do not file a tax return because they don’t believe they have to. In these cases, we are required to collect copies of W-2s, and “non-filer” from the IRS to show that the taxpayer did not file a tax return. But if the income is above the minimum income threshold, we must have a tax return.

Here are the trials of verification. What stories have you experienced? Where do you get hung up in verification?

NCAN (the National College Attainment Network) in 2017 published a study of the leaky FAFSA pipeline. According to their study, 22% of applications selected for verification drop out due to the difficulty of the process.

Don’t be part of the melt! Ask your verification question here and moneyman will help!! Don’t leave your financial aid unclaimed! Be “cool” (don’t be part of the summer melt) and don’t “flip”!

Trust, but verification

Trust, but verify“. Or in Russian, “Doveryáy, no proveryáy.” It rhymes in Russian. Cute, huh? But where does it come from?

This expression, popularized by Ronald Reagan in the context of nuclear disarmament talks with the Russians, has become a reference to being willing to believe what someone (with qualifications – namely checking to make sure it is the truth).

You could say that the same principle exists within Financial Aid as well. Federal Student Aid trusts, but verifies. They call this process “verification.”

What is moneyman talking about? When you complete the FAFSA, you enter information used to calculate your eligibility for financial aid (your EFC) such as your income, your federal taxes, the number of members of your family, and the number in college (among other items). Remember, your income is based on the last tax year available before the application year opens (so the 2020-21 application year opens on October 1, 2019, so the last tax year available at that time is 2018). Your personal information like marital status (of you and your parents), your assets and your family size on the other hand are as of the date you fill out the FAFSA.

The FAFSA takes the information provided by you and using the formula moneyman has described on this blog, comes up with your expected family contribution which determines if you qualify for a Pell grant and is used in the awarding of other need-based financial aid. But how do we know that the information you provided on the FAFSA is accurate?

Welcome to “doveryáy, no proveryáy“. While the FAFSA trusts you to enter the information, a number of applications (generally not to exceed 30% of those who apply) are selected by the government to go through a process called verification. It is a way of proving what you answered on the FAFSA by providing additional information.

When you are completing the FAFSA you have the opportunity to link your tax information directly to the FAFSA using the IRS Data Retrieval Tool (or DRT). The DRT allows Federal taxpayers to import data directly from the IRS system and answer the associated FAFSA questions. This makes the process of completing the application much easier and faster.

As an additional benefit, if you use the IRS DRT you do not have to verify your income information from another source since you have already done so by transferring information over. If you did not link your application to the IRS DRT, and you are selected for verification, you will need to provide a copy of either your Federal Tax Return transcript (available from irs.gov) or a signed copy of your paper Federal Tax Return.

How do you verify information other than taxes and income? If you re selected, colleges and universities will provide you with a verification form which you must complete to prove the information you filed on the FAFSA. If there are differences between the two sources of information, the school may contact you and ask you to explain the difference. These forms often additionally ask for untaxed income since much of that information cannot be determined from a copy of your tax return.

There is one additional type of verification for which you may be selected, and that is when you are asked to provide your identity by providing documents including proof of citizenship and high school graduation, as well as indicating that you understand that the financial aid you are receiving is for an educational purpose. This is done through another form also provided by your financial aid office.

Some schools (especially those who have a lot of their own grant or scholarship funds to distribute) may select all of their students to go through verification. This is usually because they want to be sure that the amount of funds they provide to students (which is often much more than that provided by the Federal government) is given to those who need the funding. Remember, “trust but verify.”

Verification tends to be a stumbling block for a number of student financial aid applicants. We will explore why in some coming posts, but keep in mind this generally is a requirement of Federal Student Aid and it is just a way to confirm the information provided on your financial aid applications.

Pound the Alarm (Coronavirus CARES Act)

Mad props to Nicki Minaj. That’s it. No other reason. Just love for her.

OK, well, I will say that if there is a big alarm bell for higher education, we pounded it these last few weeks! “Somebody call 911… shawty fire burning on the dance floor”. Never mind, that’s Sean Kingston.

Doesn’t matter what you call it; we’re in pretty urgent times. Can we all just hit snooze?

Regardless of the background music you have running in your head right now, it is pretty clear that we are in emergency times. Last week, the US Congress passed (and the President signed) the CARES Act (the “Coronavirus Aid, Relief and Economic Security Act”), also known as the $2 trillion relief package. There are some pretty important parts of this law and today’s post is going to review them (and what might have impact for you). If you want to read along in the final text of the law, feel free to do so — you can find the text here. Just keep in mind that the final bill is 335 pages long; I’ve picked out the important pieces for you and for higher education below.

First let’s talk about the individual taxpayer checks that are coming. Under Section 2201 of the Act (pages 55-60), a new program called “Recovery Rebates for Individuals” is created. Under this program, most taxpayers will be getting a stimulus check in the amount of up to $1200 per adult (with income caps) and $500 per child under the age of 17 in the household. CNN has a pretty handy calculator to determine how much you can expect in your stimulus check. Remember, this is based on your 2019 Adjusted Gross Income (if you already filed your 2019 Federal Income Tax Return) or your 2018 return. Since I know you read every blog entry with care, just a reminder that you can learn a lot more about Federal Taxes by visiting this section of the blog.

The next big item is the amount of Emergency Grant funds for colleges and universities. The Act sets aside about $12.5B in emergency funds for institutions to help students during this crisis; you can find the rules for this under Section 18004 (pages 287-288) of the Act. These funds can be used in the following manner: 1/2 MUST be used to help offset student expenses by providing direct grants to students, while the other 1/2 CAN be used to offset the institution’s expenses in moving to online education (including technology, payroll, etc). Individual colleges will see large amounts of money directed to them under this program; the American Council on Education ran an estimate of how much they think colleges will each receive (based on enrollment, Pell participation, and other data). These numbers are estimates only, but as an example USF (Main Campus) is expected to receive $29.5M, UCF to receive $47.6M, Miami-Dade College to receive $47.4M, Broward $27.5M, and so on. To be clear, these are only estimates and no final rules have yet been shared by the Department of Education (nor do we as colleges have this money yet since the law was just signed Friday) but we know that whatever comes this will be very helpful for you, our students.

And the bill goes on from there. Below I am going to highlight some sections of the bill, page numbers, and a brief description of the relief coming from this part of the Act. All of these are higher education changes:

  • Section 3503 (page 116) – waivers of matching requirements for schools for Campus Based Fund (SEOG and FWS). This means that schools do not have to match Federal awards in these programs with their own dollars (it has been a 75/25 match) allowing schools to use this money in other ways to help students. This waiver is for two years (2019/20 and 2020/21).
  • Section 3504 (pages 116-117) – use of Supplemental Education Opportunity Grant (SEOG). This section allows colleges and universities to use the funds awarded to them by the Feds in SEOG to now help both undergrads and grad students and to ignore the previous rules about awarding order (reserving this money for those who have Pell Grants first).
  • Section 3505 (page 117) – paying Federal Work Study (FWS) students. This section specifically allows schools to pay their FWS students if the campus has to close (although online classes are still being offered) and students cannot work any longer on campus.
  • Section 3506 / 3507 (page 118) – for students who withdraw, ignoring usage limits. Pell Grants and Subsidized Loans have aggregate limits so that once you use your limits, you can’t have any more Pell (or Subsidized Loans). Under this section if you withdraw during the period of national emergency, the Pell or Subsidized Loan you received won’t count against your limits.
  • Section 3508 (pages 118-119) – Institutional refunds and loan flexibility. Again this section is for students who withdraw during this emergency. Under this section, neither institutions nor students would have to return unearned aid to the government (like we usually do if you don’t attend at least 60% of the term). In addition, if a student withdraws, the amount of any Federal loan borrowed for that period would be cancelled.
  • Section 3509 (page 119) – Satisfactory Academic Progress. This section says that for students who withdraw due to the emergency, colleges can ignore the courses that they have withdrawn from in determining their completion percentage (which has to be above 66.6%).
  • Sections 3510, 3511, 3512 (pages 119-124). These cover foreign institutions, emergency waivers, and HBCU capital financing. Important for these schools, but not relevant to many of you students.
  • Section 3513 (pages 124-125) – Federal student loan relief. Under this section, Federal student loan interest rates are set to 0% and no payments are required for 6 months (until September 30, 2020). In addition, all forms of collection (wage garnishment, reducing tax refunds or other federal benefits) are halted.

There are some other Higher Ed sections but they are mainly technical (pages 125-130). The only one that may interest some of you is the waiver of teaching service for those receiving the TEACH grant during this time.

Sooooo…… lots of changes. When does this all go into effect?? Well technically as of the day the law was signed but we usually get some guidance from Federal Student Aid at the Department of Education on how to implement changes. We have no guidance or announcements yet on the CARES Act so stay tuned. There is a lot more to come.

For now, ask your questions. I’m sure you have some. I can’t promise answers but I will sure try!!

Is my scholarship taxable (and other financial aid tax questions)?

As we come to the end of January, I thought we could finish the month with some short Qs and As about financial aid tax-related questions. If you have some I didn’t cover, feel free to post them in the comments section. Keep in mind as I begin that I am not an accountant so please understand this is general advice (and not tax advice). You always want to check with an accountant if you have specific questions about your own situation.

Answers to your questions
  1. Is my scholarship taxable?
    1. I am so glad you asked that question! Generally scholarships are not taxable as long as you are using the proceeds to pay for recognized educational expenses (like tuition, fees, books and supplies). Any amounts above those expenses that are provided by your scholarship (like amounts for room and board, travel, and other expenses) may be taxable income in the year you receive them. If you have questions or want to know more, take a look at the IRS guidance on scholarships.
  2. Do I have to pay taxes on my Work Study earnings?
    1. Work study earnings are just like any other earnings from work. If you earn more than the minimum amount required to file a tax return (including your work study earnings), then you must file a Federal Tax Return. A benefit of work study earnings, however, is that they will be subtracted from the income you earn when you file the FAFSA and you use as your base income the year in which you earned this income; this way you are not doubly penalized for this income.
  3. Can I claim a tax credit for the tuition I’ve paid this year?
    1. Maybe. There are two tax credits which you might qualify for if you paid any expenses for education: the American Opportunity Credit and the Lifetime Learning Credit. The rules and specifics for these credits vary based on your income (and there are income levels where these benefits phase out), but for many families, these credits can either reduce the amount you owe the IRS by lowering your AGI or might increase the amount of your refund. In order to receive one of these credits, you will need to collect the Form 1098-T issued by your college or university (which you will use to complete the required Form 8863). The American Opportunity Credit can give you as much as a $2500 credit per student, while the Lifetime Learning Credit can give a $2000 credit per household. Lots more information at the IRS page for these programs.
  4. Can I claim the interest I paid on my student loans as a deduction against my income?
    1. Again, depends. There are income cut-offs but generally students can claim up to $2500 (or the actual amount of interest paid, whichever is lower) as a deduction against their taxable income. This deduction means you can possibly reduce the amount of taxes you owe if you already paid student (or parent) loan interest in 2019. Again, much more information on the IRS page.
  5. Is there one place I can get all of the information on tax issues pertaining to higher education?
    1. I am so glad you asked. The IRS has a publication for you! Called IRS Publication 970 (Tax Benefits for Education), this 93 page document has all of the information you would ever want about the topic (and more than I have room to cover here).

So there are some key Questions and Answers. And this closes out our tax review for January 2020! Next month our topic is maximizing your scholarship opportunities and exploring the benefits of the Florida prepaid program! Talk more then!

What should I do with my refund?

Tax filing season is upon on shortly. The IRS is almost prepared to receive your Federal Income Tax return for 2019, and by the end of February you can expect to receive a refund check from the IRS if you indeed are owed one. Before you make plans to spend it on the latest must-have item (be that video game, cell phone, or clothes), let’s talk…

Your best option for your tax refund….

First of all, let me be clear. In this post I am going to talk about both what do you do if you owe money to the IRS, and what to do with your refund if you are lucky enough to get one. You might want to think about it this way: the best solution would be to owe nothing and to have no refund owed you.

If you carefully plan your withholding from your pay check, you would not be overpaying the Federal government every time you get paid (and therefore be owed a refund), and you would not be underpaying the Federal government (therefore owing money to the IRS). The amount you withhold from your paycheck is based on your W-4, and now is the time to check for 2020 (before too many paychecks go by) to see if your withholding is right for this year. You can do this at the IRS withholding estimator.

If you do owe money after filing your Federal Tax Return for 2019, it is time to review your W-4 form and perhaps choose to withhold a little more money. This way you are not hit with a bill at the end of the cycle for money which you should have withheld anyway.

If you are receiving a large refund, you might also want to review your withholding. You should look to see if you can adjust your W-4 so that you actually receive your money earlier in the year. If you get a refund, it is kind of like giving the government a loan for free since you should have had this money earlier; the Feds have been able to hold on to your money all year, and they paid you no interest on that money.

Regardless of the size of your refund I would suggest one particular choice for you for your refund check — don’t spend it frivolously! This is the time to take a look at your emergency spending and perhaps make a plan to start a savings account.

Most financial advisors will suggest that you should have an emergency fund which would allow you to cover 3 to 6 months of expenses if for some reason you lost all of your income. Now I know that it is unlikely that you will have enough to cover all of this as a current college student, and frankly most adults don’t have this kind of savings available, setting ANYTHING aside for emergency savings is a great idea.

Why do you need emergency savings? Remember that the best financial plan can be derailed by a simple urgent matter — a flat tire, an illness, a car breakdown, an unexpected reduction in hours, a parent who needs help. You may be asked to spend money you simply don’t have and the worst solution is to borrow money (like with a credit card or a payday lender) in an urgent situation. By having some savings, whatever you can afford, you guarantee that you can get through that urgent situation.

What a perfect way to start your emergency savings — with your IRS tax refund. Don’t spend it on luxuries. It’s not a lucky break, or a gift, or money you shouldn’t have already had in your budget. Make sure to save it! That’s the best plan!

Questions? Suggestions? Type away! Comments welcome.

“…Nothing can said to be certain except FAFSA and taxes…”

So maybe this isn’t the actual quote, but I think it applies. Benjamin Franklin may not have known about the FAFSA, but if he did, I bet he would have written it my way.

You just can’t escape it… Death and Taxes.

Well while you may not be able to avoid taxes, you can certainly find a free way to file them. Filing a tax return for most of us can be a (relatively) simple, cost-free, and pain free process and as I explained in my last post, it is an important part of your application for financial aid.

If you are required to file a tax return, and your file is selected in a process called “verification”, you will be required to either link your FAFSA to your tax information or provide a copy of your tax return to the Financial Aid Office. Unfortunately, the excuse of “I didn’t know I had to file” won’t work!

So if you do have to file, what are your options? Like many tasks these days, you can do this in a paper format or online (and the online form is easier).

First, the paper version. For those of you who want to see the actual form in paper (with the appropriate instructions), you can visit the IRS (Internal Revenue Service) form page. Keep in mind that before 2018, there were several versions of the tax form (1040, 1040 A, 1040 EZ). Starting with 2018, there is only one tax form (1040) but lots of schedules which you may need to complete depending on your personal circumstances.

You could print out the paper forms, read the 108 page instruction booklet, and do all the math yourself, but I know a much faster and easier way to do it. There are several online services which will allow you to safely and securely complete your 1040, and for most of you the cost will be $0.

You can find a list of these companies and services on the IRS webpage. Most of these products will provide you a free service with optional add-on packages for more complicated situations (like those with self-employment or with complicated capital gains). Also some of these companies will prepare your state tax return for free as well (remember that Florida doesn’t require an individual tax return). There are income limits for the free services but most students will qualify.

What is especially helpful about these services is that they will ask you a series of questions designed to make sure that you have thought of all of your possible exemptions and deductions. This way they make sure that you have maximized your possible refund (or reduced what you may owe).

Of course there is also a third option: use an accountant. If you have a complicated situation or think you might need someone with professional experience to help you complete your forms, you can hire a CPA to assist you. In Orlando, there is even a free service (sponsored by the United Way) called VITA (Volunteer Income Tax Assistance) where volunteer professionals can assist in preparation of your return. Check with the United Way in your area to see if they have a similar service.

Now, when do you have to have the return filed? The deadline for filing your taxes is April 15th for the calendar year just past. You can get an automatic six-month extension for filing your tax return, but you will need to pay what you owe by April 15th in any event. Of course, if you are expecting a refund you will want to file as soon as possible so that you can have your money in hand as soon as possible.

Keep in mind companies have until January 31 to send out W-2 forms to you which report your income to you for filing purposes, and some companies send other forms into mid-February. You want to make sure you have all of your forms before you file your return; otherwise you may need to file an amendment which can take more time.

So in summary, look for your forms from your employers, school, and other sources, find your free online partner, and get ready to file. Let me know if you have any questions.

And remember, Benjamin Franklin had it right. No one can escape taxes (and the FAFSA)!

First Draft: W-2s and 1040s

Hello all, and welcome again to 2020. I am sure many of you are heading into the Spring semester with new classes, new beginnings, and new opportunities for learning.

One of the new questions that has been circling around given the current world environment has to do with filling out the FAFSA and the military draft. Since there has been a lot of confusion about this, I thought I would add a few words of clarification here.

Filling out the FAFSA does NOT put you in the front of the line.

First, a reminder that we do not have an active draft. Remember we have an all volunteer armed forces (and we owe a great deal of gratitude, honor, and appreciation to those who volunteer for service). It would take an act of Congress to re-institute the Draft, and there is currently no move to do so.

Secondly, while registering for Selective Service is a requirement for men who are 18 years of age and older, and checking your status is a requirement for receiving Federal financial aid, there is no “priority” for those who complete the FAFSA. In fact, the information confirming your registration comes from a database match between the two systems (FAFSA and Selective Service) and no permanent record is maintained of this check on the Selective Service side.

So what is Selective Service? It is a system that guarantees that IF a draft is ever declared that all men ages 18 to 24 would be eligible for service. But again, this hasn’t been used since the Vietnam War and no one has suggested that the Draft would be restarted.

So now that we have put that issue to bed, let’s return to taxes. The first question you should be asking is do I have to file a Federal Income Tax Return? Generally if you are single, under the age of 65, and not self-employed (only paid by your employer through a standard paycheck), then as long as you earned less than 12,000 in 2019, you do not HAVE to file. a Federal Tax Return. If you are claimed by someone else as a dependent, you are married or self-employed (or both), or you have other special circumstances you should check with the IRS to see if you are required to file. The IRS has an interactive tool that can help you determine if you are required to file a return.

Just keep in mind, even if you don’t have to file a return, you may still WANT to file a return. Check your paystub or W-2; if your employer has taken out Federal Income Tax, the only way you can get this money back is by filing a tax return. And the amount withheld may make it worthwhile.

Especially because there are many free resources to help you file your taxes. More on this next time.

What paperwork should you have ready when it is time to file your return? First, make sure you have the W-2 forms from each of your employers for 2019. These forms show how much you earned for the year and how much Federal Income Tax was withheld. Note that companies might not send these to you until the end of January. You also want to make sure you have any 1099 Form for miscellaneous income (or self-employment income). Also make sure you have any other tax forms you might have been sent (like interest forms from your bank, or loan repayment forms for your education loans, and your 1098-T from your college for tuition paid).

We’ll get more into the filing process next time on the blog! Stay well!

I hereby resolve… and other resolutions

Happy 2020 to my dear readers. May the coming year bring you happiness, health, and great college experiences!!! Here we are at the start of another year, and once again it is time to turn to that most majestic of annual traditions. It is a tradition where we state a goal at the beginning of the year and then (hopefully) work towards the goal throughout the year; some of us pay close attention to this and others simply ignore it except at this time of the year. Yes, I am talking about — taxes. (Did you think I was going to discuss New Year’s Resolutions? Yes, that conversation will come soon too!

2020 and the 1040 – a match made in heaven

For many of you, January is the month where you will file your tax returns (or at least get ready to file them) so that you may receive your tax refund as quickly as possible. If you will owe money, remember that you have until April 15 to file your Federal Tax Return (much more on this to come).

In the coming month we are going to address how to file a tax return (including free resources to get it done), why you might want to file, and common traps to avoid.

To begin, let me know if you have any particular questions about income tax forms which have been puzzling you. Remember that your financial aid is based (in large part) on the information on your (and, for dependent students, your parents’) tax returns, so you want to make sure you file them in a timely manner so you don’t delay your financial aid application. With the current financial aid system, the income tax return for 2019 (which you will file in the next few months) will be used in your financial aid application (FAFSA and others) for 2021-22 (which you will be able to start completing as of October 1, 2020).

Confusing, I know. But moneyman is here to help! We will tackle each piece one step at a time.

For now though let’s talk about resolutions. What New Year’s Resolution have you set for yourself? What commitments will you make to your financial health (as well as your emotional, physical, psychological, and spiritual health)? Add yours as comments to this post and let’s be a community of support for each other.

With eyes wide open (20/20 – get it?), here’s to a year of great success and clear goals. Happy New Year!