When in doubt, people go to experts.
But beware if you turn to an expert with your FAFSA, or the college financial aid form that many parents are now rushing to complete before February and March deadlines.
The typical tax professional that helps you with your tax return may not be equipped to maximize your financial aid. In fact, your tax preparer might inadvertently undermine your chances of getting aid.
This seems improbable to many people because tax preparers try to show Uncle Sam that you have a low income so you can get a refund. Seemingly that would be the same strategy for winning financial aid for college. Afterall, we know that aid is based on our income and so having a lower income should increase our chances of getting aid.
Unfortunately, however, the complex formula built into the questions you answer on your FAFSA, calculates your income and family expenses differently than the formula built into your tax return. And the result: people who think both tax returns and FAFSAs operate the same, can end up shooting themselves in the foot when it comes to aid for college.
If your tax preparer gets you a state tax refund, you will have to report it on next year's tax form as part of your adjusted gross income. If you collect an average state and local refund of $1,600 each year over the four college years, you may have cost yourself as much as $3,000 in grant money. Also, certain strategies for cutting income on tax forms fail to reflect expenses you have incurred like Social Security and Medicare. While that's fine for taxes, on your FAFSA form, this might leave you looking like you are in better shape financially than you are. Converting an IRA to a Roth IRA might also make sense for taxes, but could hurt you when applying for financial aid. In addition, putting money into 401(k)s and IRAs can help boost a tax refund, but won't help you with financial aid.
Meanwhile, if you are getting help on your taxes and you are also applying for financial aid this year, choose a tax professional that also understands the quirky financial aid formula.
But beware if you turn to an expert with your FAFSA, or the college financial aid form that many parents are now rushing to complete before February and March deadlines.
The typical tax professional that helps you with your tax return may not be equipped to maximize your financial aid. In fact, your tax preparer might inadvertently undermine your chances of getting aid.
This seems improbable to many people because tax preparers try to show Uncle Sam that you have a low income so you can get a refund. Seemingly that would be the same strategy for winning financial aid for college. Afterall, we know that aid is based on our income and so having a lower income should increase our chances of getting aid.
Unfortunately, however, the complex formula built into the questions you answer on your FAFSA, calculates your income and family expenses differently than the formula built into your tax return. And the result: people who think both tax returns and FAFSAs operate the same, can end up shooting themselves in the foot when it comes to aid for college.
If your tax preparer gets you a state tax refund, you will have to report it on next year's tax form as part of your adjusted gross income. If you collect an average state and local refund of $1,600 each year over the four college years, you may have cost yourself as much as $3,000 in grant money. Also, certain strategies for cutting income on tax forms fail to reflect expenses you have incurred like Social Security and Medicare. While that's fine for taxes, on your FAFSA form, this might leave you looking like you are in better shape financially than you are. Converting an IRA to a Roth IRA might also make sense for taxes, but could hurt you when applying for financial aid. In addition, putting money into 401(k)s and IRAs can help boost a tax refund, but won't help you with financial aid.
Meanwhile, if you are getting help on your taxes and you are also applying for financial aid this year, choose a tax professional that also understands the quirky financial aid formula.
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