Taxes and the FAFSA: What You Need to Know
FAFSA season and tax season may coincide, but that doesn't mean you have to wait until taxes are done to file for financial aid. It's always better to lock down money to pay for your education now than to wait and miss out.
The Free Application for Federal Student Aid, or FAFSA, determines how much financial aid you qualify for. But it's the schools that determine how much money you'll actually get. "There might be money your family is eligible for, but if you miss the deadline you might not get, because colleges run out of award money," says Jodi Okun, founder of College Financial Aid Advisors.
At Mount St. Mary's University in Maryland, for example, the FAFSA deadline was March 1, more than a month before taxes are due. "We realize we're forcing the majority of our families to file a FAFSA form before they file their taxes," says Dave Reeder, the school's director of financial aid. "It's something we wrestle with each year."
Early FAFSA deadlines mean you'll have to estimate your family income on the document and then make corrections later on. Here are some steps to take:
1. Estimate your income.
If you're like most students, your parents' tax returns will dictate the financial information you'll include on your FAFSA. If your family's income didn't change much from what was reported last year, use that tax return.
"If you have last year's tax filing in front of you, you should be able to knock it out," says Lois Basil, a financial advisor and owner of the Basil Financial Group based in Chicago. "The important thing is getting a number to the college."
If you or your parents' adjusted gross income differs substantially from the year before, you can use the income estimator on the FAFSA website to come up with a close estimate.
2. File a correction.
Once your family files tax returns, you'll need to correct the information on your FAFSA. That's where the IRS Data Retrieval Tool comes in. It allows you to transfer the IRS tax return information you'll need to make a correction on your FAFSA.
"The tool helps the school know the data is valid, and they can make financial aid awards," says Diana Draper, director of financial aid at Fairfield University in Connecticut. "It has saved students and schools quite a bit of time in the review process of financial aid."
Here's how to use the tool:
1. Go to www.fafsa.gov and click on "Login."
2. Enter your student information to log in.
3. Once you get to the "My FAFSA" page, click "Make FAFSA Corrections."
4. Click the "View option to link to the IRS" link.
5. Answer eligibility questions.
6. Enter your PIN once again and click "Link to IRS." (This will take you from the FAFSA website to the IRS website.)
7. At the IRS site, enter all requested personal information as it appeared on you tax return or your parents' tax return.
8. Review all tax return information marked "Transferred from the IRS."
9. Sign and submit your new information.
There are some cases in which you can't use the IRS Data Retrieval Tool. For example, if you or your parents filed an amended tax return, or if your parents are married and filed taxes as head of household, you won't be able to use the tool. See the FAFSA website for a full list of exceptions.
If you can't use the tool, you'll need to request a copy of the IRS tax return transcript be sent directly from the IRS to your school.
Ensuring Accuracy
There's certainly pressure to get your FAFSA in on time, but that's no reason to rush, Reeder says. "A lot of families want to get that FAFSA form in as quickly as possible, but over the years we're seeing a larger number of FAFSAs with significant mistakes," he says. "Deadlines are important, but the FAFSA form is an important document and a document families need to take their time with to make sure it's accurate."
If you have questions, talk to your school's financial aid office or visit www.studentaid.gov.
Alexandra Rice writes for NerdScholar, a website run by NerdWallet that helps students and parents make smarter financial choices.
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