FAFSA Online Secret: Reduce your Adjusted Gross Income (AGI)
A formula to consider: FAFSA aid = f(1/AGI)
That formula above means that your FAFSA aid (your federal financial aid) is inversely proportional to your Adjusted Gross Income (AGI).
Now here's what that means in plain English.
What is Adjusted Gross Income (AGI) and why does it matter?
To have the biggest impact on the amount of federal financial aid you receive via your FAFSA, you want to reduce your Adjusted Gross Income (AGI).
On your IRS tax return, AGI is the amount of money you make per year, after some standard adjustments. So how do you calculate your AGI?
AGI = Income - AdjustmentsKeeping that calculation in mind, there are good and bad ways to reduce your AGIbad ways would include losing your job and/or other sources of income. But good ways to reduce your AGI include:
- Making the maximum contribution to your IRA
- Making the maximum contribution to your retirement plan, like your 401K
- Consolidating your federal student loans. (Interest paid on federal student loans is deducted from your AGI. Consolidation initiallyas with all loanshas you pay more interest up front than principal, so consolidation reduces your AGI more than unconsolidated student loans.)
- Deducting applicable tuition and fees
- Accounting for other deductions, like moving expenses
- Using health savings accounts (flex spending accounts or FSA). These are deducted from your AGI, so if your employer offers them, use them. You'll likely find these noted on your W-2 pay stubs.
Other deductible considerations that may apply to you:
- Alimony paid
- Archer MSA deduction
- Certain business expenses of reservists, performing artists, and fee-basis government officials
- Domestic production activities deduction
- Jury duty pay you gave to your employer
- One-half of self-employment tax
- Penalty on early withdrawal of savings
- Self-employed health insurance deduction
- Self-employed SEP, SIMPLE, and qualified plans
The best advice for Adjusted Gross Income reduction
Even though it costs money, consider using a professional tax preparation specialist for your taxes if your child is in college or beginning college in three years or less. Though you'll pay to have your taxes done, you can discuss with a tax professional all the different options for reducing your apparent AGI, which will, in turn, make you more qualified for federal financial aid.
Avoid using the IRS 1040A or 1040EZ forms to file your taxes, as they miss the critical deductions for tuition and fees as well as student loan interest.
Keep your student loan paperwork throughout the year, and if you consolidate your federal student loans, keep the paperwork for both the original company and consolidating company. You'll need both on hand when you do your taxes.
Some tax preparers do not charge until your taxes are completed and ready to be filed. If you are unsure about how this tip will affect your tax preparation, consider visiting one of these professional preparers and making use of their expertise.