FAFSA Online Secret:
Reduce Your Adjusted Gross Income

FAFSA Aid = f(1/AGI)

Okay, you probably saw that and might have panicked. Here's what it means. Your FAFSA aid, your federal financial aid, is inversely proportional to your adjusted gross income. Wait, we'll explain...

What is Adjusted Gross Income?

On your IRS tax return, Adjusted Gross Income (AGI) is the amount of money you make per year, after standard adjustments. How is the adjusted gross income computed?

AGI = Income - Adjustments

The goal is to reduce your adjusted gross income. Now, there are good ways and bad ways to do that. Bad ways include losing your job and sources of income. Good ways to reduce your adjusted gross income include:

• Make the maximum contribution to your IRA.
• Make the maximum contribution to your retirement plan. (401k, etc.)
• Consolidate your federal student loans. Interest paid on federal student loans is deducted from your AGI. Consolidation initially (as with all loans) has you pay more interest up front than principal, so consolidation reduces your AGI more than unconsolidated student loans.
• Did you move? Other deductions include moving expenses.
• Use health savings accounts (flex spending) - these are deducted from your AGI, so if your employer offers them, take advantage! You'll find these noted most likely on your W-2 pay stubs.
• 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

Best Advice

Even though it costs money, consider using a professional tax preparation specialist (i.e. H&R Block, etc.) 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.

Important Tips

Be sure to 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 at least visiting one of these preparers and making use of their expertise.

Next Step:

FAFSA Online Secret: Give me the cash! No, wait, don't!

FAFSA Help Guide: Financial Information