Is an Inheritance Considered Income on the FAFSA?

Inheritances are not a common financial event, thankfully; but they sure can create some confusion for the FAFSA and CSS Profile processes.  Most parents and students assume that because money is received out of an inheritance it must be income.  This is not necessarily true.

First of all, you need to be aware that neither the FAFSA nor Profile mention inheritances as income.  There are those catch-all questions such as on the FAFSA which asks for all income not recorded else where on this form and includes the example of having bills paid on the student’s behalf.  There is however no further description of what that income might be.  If you search the FAFSA and government student aid websites, you will find no mention of inheritances except as a brief example of a student whose financial picture changed over the summer and then may not want to borrow as much money as before.  If you search the Profile related websites, the only context of inheritance is regarding the valuation of inherited assets.

So in other words, the FAFSA and the Profile are silent regarding inheritances.  In such a case, the smart money is to rely upon the recognized authority in defining income.  This is typically the Internal Revenue Service (IRS).  The IRS does not define inheritances as income.

Then how do inheritances affect a student’s financail aid filings on the FAFSA or CSS Profile?  They affect the filings through the valuation of students’ and parents’ assets and the income generated from those specific assets while in the possession of the immediate family.  That income could be capital gains, dividends, or interest earned.

For example… A grandparent dies in June 2009 and leaves $250,000 to the parents in cash, and $15,000 in cash to the student.  This inheritance would not be reported in any income column on the FAFSA.  However, at the time of filing the FAFSA form in February 2010, the parent still has $200,000 of the inheritance and the student has $5,000 left of the inheritance.  These assets will be reported on the FAFSA form as savings or investments.  In addition, the parent’s $200,000 generated $1,000 in interest for half the year, and the student’s $5,000 did not generate any income.  The $1,000 in interest will be reported as interest income on the FAFSA.

Keep in mind, some colleges and universities may consider inheritances as income for their individual forms.  Double check those forms before assuming the guidelines above apply to institutional paperwork.

4 Guidelines For Claiming Rental Property As a Business on the FAFSA

Rental Property on the FAFSA has always been an area of contention in my mind.  The manner these assets are listed on the FAFSA can mean the difference of thousands of dollars in financial aid.   For the government to tell you what is and is not a business enterprise that is making money kind of frosts me.  The 2009-10 FAFSA Application and Verification Guide states the following…

At times a student or parent will claim rental property as a business.  Generally, it must be reported as real estate instead. A rental property would have to be part of a formally recognized business to be reported as such, and it usually would provide additional services like regular cleaning, linen, or maid service.

If at all possible, you want to claim real estate as a small business, and therefore qualify for the small business exemption on the FAFSA form.  Here are a few guidelines to follow which make claiming real estate as a business much easier.

1.  Organize under a separate legal entity – Don’t hold rental properties directly in your name and expect them to fly with a financial aid officer.  They should always be organized under a C-corp, S-corp, LLC, or similar entity.  This is by far the most important qualification to be considered a business asset.

2.  The more activity the better – If you just have one piece of property that you rent out, or if you have a vacation cottage on a lake that maybe you rent once or twice during a season; don’t expect that to be considered a business asset.  The more activity you have in real estate the better.  You need to be able to demonstrate substantial levels of material participation and activity.  If you have multiple properties and active participation in managing them, it will strengthen your case.  This is one area where going big and acquiring more assets will help you.

3.  Show associated activity – The following activities showing in your corporation may also indicate more business activity, rather than just rentals:

  • Develops or redevelops
  • Constructs or reconstructs
  • Acquires
  • Converts
  • Operates or Manages
  • Brokers
  • Other business activity associated with the property

4.  Other activities – There are other signs or activities which will add weight to listing real estate as a business operation:

  • Registering for appropriate state and local permits
  • An employer identification number (EIN)
  • Fictitious name registration or DBA for the business
  • Separate business checking account

These four guidelines will definitely strengthen your hand in getting that small business exclusion on the FAFSA form.  But it is not a black and white standard.  Some schools will let you keep the exclusion, others will not.  My recommendation is when in doubt, list the property as a business.  Make the school take the initiative to prove it otherwise.

The Fundamentals of FAFSA

Nearly every college in the United States relies on FAFSA to determine how much financial aid – including grants, loans, and work study – a student can receive. The entire FAFSA process can be a daunting and difficult one for those who do not know what to expect. Before filling out and filing the FAFSA form, it is first crucial to understand what it is and what it does. Otherwise, it is liable to look like so much Greek. The following is an explanation of the fundamental points of the Free Application for Federal Student Aid.

A student’s financial aid package depends first and foremost on his or her Expected Family Contribution, or EFC. The purpose of FAFSA is to calculate what a student’s Expected Family Contribution is. That is the reason why the United States Department of Education created the Free Application for Federal Student Aid. FAFSA determines what is known as a “need analysis,” which is based on a student’s financial information. Important factors include income and assets – meaning that a student is not necessarily out of luck simply because they or their parents make a lot of money. For instance, if a family makes a lot of money but most of it goes toward paying bills, leaving only a small amount, then a student can still receive a very good financial aid package. However, this only applies if a student is a dependent student – that is, dependent on his or her parents. Once the FAFSA form is analyzed and processed, the findings are forwarded to the student’s university of choice.

There is some form of financial aid out there for every student no matter what his or her income – and no matter what his or her family’s income. There are, however, certain eligibility requirements for FAFSA. A student must be either a citizen of the United States or else an eligible non-citizen of the United States. He or she must have a valid social security number, as well as either a GED or a high school diploma. He or she has to have completed the FAFSA form, wherein he or she promises that the federal aid will be used for education. If the prospective student is a male between the ages of eighteen and twenty-five, he must be registered with the United States Selective Service. To be eligible for FAFSA, a student cannot owe any refunds on federal grants, cannot have defaulted on any student loans, and cannot have been found guilty for the sale or possession of illegal drugs, at any time that he or she was receiving financial aid.

The FAFSA form must be completed before a student can receive any financial aid. It is the first and most important step in the financial aid process. FAFSA is the most important thing when it comes to determining how much financial aid a student will receive as well, so it is important to be detailed and truthful when filling it out and extremely prompt in filing it.

What is FAFSA?

FAFSA or Free Application for Federal Student Aid is a form that is filled out by university students and parents to apply for federal financial aid, which includes grants, scholarships, student loans and work-study programs. In addition to the federal government, schools, states and private financial institutions also use the information from the FAFSA to determine a student’s eligibility for non-federal aid.

Each year, the Department of Education issues a new FAFSA for the subsequent academic year. You can either use the online version of FAFSA or you can obtain a printed copy of the application form from your high school counselor. If you intend to use the online version, then you would have to apply for Personal Identification Number (PIN). For this you would have to submit your name, date of birth, social security number and address. Once, you get your PIN, you can fill out the form and submit it online or print it and send it by mail.

While the printed version of FAFSA becomes available in the second week of October, the online version becomes accessible on January 1. Although the last date for the submission of FAFSA is June 30, but you can submit the form in either format as early as January 2. Most colleges and universities award financial aid on first come, first serve basis. Hence, to improve your chances of receiving financial aid, try to submit the FAFSA latest by March 1.

There are 102 questions in FAFSA, which are segregated into six sections. The primary aim of these questions is to retrieve your academic, personal and financial information. You would also be required to divulge your dependency status, colleges you want to receive your FAFSA results and your identification information. For filling out the FAFSA properly, you would need previous two year’s copies of your income tax returns.

Once you submit the FAFSA, the government will scrutinize it thoroughly, and then send you a Student Aid Report (SAR). The SAR typically includes a summary of your financial aid information and the EFC (Expected Family Contribution). The colleges enlisted in your FAFSA will also receive SAR. When you apply for admission in these colleges, you will be asked to submit additional financial information. Thereafter, your eligibility for financial aid will be calculated, and then you will be notified about the kind of financial aid package the college can award you.