How Do You Calculate Individual Income From a Joint Return for the FAFSA When the Parents Are Separated?
February 28, 2011
In your answer to How Does Income Tax Filing Status Affect Student Aid?, you address the question of which parent is responsible for completing the FAFSA. However, I’m very curious as to how the filing status of separated parents affects how the FAFSA is processed, once the primary/custodial parent has completed it. That is, is it more advantageous for separated parents to change their filing status to “married filing separately” so that the FAFSA only shows the income of the one parent who completed it? It seems like it would be in the parents’ and student’s best interest for the parent to have an income tax filing status that demonstrates a greater need. — Brad R.
As noted in the previous Ask Kantro column, tax filing status does not affect who completes the FAFSA. It also does not affect the amount of income that is reported on the FAFSA. Only the income of the parent responsible for completing the FAFSA is reported on the FAFSA.
Marital status on the FAFSA does not necessarily have to match marital status on the federal income tax returns. There is a little play in the joints that can lead to one status on the federal income tax return and another status on the FAFSA. The most common circumstances in which one might file a federal income tax return as married but the FAFSA as separated include:
1. The parents have an informal separation but not a legal separation or divorce. During an informal separation the parents may not live together and must maintain separate residences. If the parents have an informal separation they must still file their federal income tax returns as married (either as married filing jointly or as married filing separately) but file the FAFSA as separated.
2. The parents were married on the last day of the tax year, but became divorced or separated between then and the FAFSA application date. In such a circumstance the parents would file federal income tax returns as married (either as married filing jointly or as married filing separately) but would file the FAFSA as divorced or separated, as appropriate.
Note that if the parents are divorced or have a legal separation as of the last day of the tax year they cannot file federal income tax returns as though they were married. Using the incorrect federal income tax filing status in this situation is a fairly common error. If the FAFSA is selected for verification and the college financial aid administrator discovers that the wrong tax filing status was used, this is considered conflicting information. The financial aid administrator is precluded from disbursing student financial aid funds until the conflicting information is resolved. Resolving the conflicting information may include requiring the family to file amended income tax returns if they wish to receive federal student aid.
If the parents are separated, only the income and assets of the custodial parent are reported on the FAFSA, regardless of the tax filing status of the parents. If the custodial parent files a return with a status of married filing separately, identifying her adjusted gross income (AGI) from the income tax return is easy. On the other hand, if the parents filed a joint return, the custodial parent must calculate her income and taxes paid using information from the joint return and the relevant IRS W-2 and 1099 forms. The income calculation is based on the income from the custodial parent’s W-2 forms, plus half of the income (or losses) from joint accounts and investments.
There are two approaches to calculating the taxes paid attributable to the custodial parent from a joint return. The preferred method is to use the IRS Tax Table or Tax Rate Schedule to calculate the amount that would have been paid if a separate return had been filed, assuming the appropriate deduction and number of exemptions. The other method involves a proportional distribution of the taxes paid on the joint return based on the custodial parent’s share of the joint AGI.
The bottom line is that the income should be the same regardless of whether a joint or separate return was filed. The taxes paid may differ slightly, depending on the method used to calculate the split, but this usually has a negligible impact on the expected family contribution as calculated by the FAFSA.
The main benefit of filing a separate return, if that is an option, is that a separate return simplifies the income and tax calculations. It also avoids some headaches, such as might occur if the FAFSA is selected for verification. But filing separate returns precludes the taxpayer from claiming certain education tax benefits, such as the Hope Scholarship tax credit, Lifetime Learning tax credit, Tuition and Fees Deduction, Student Loan Interest Deduction, and the exclusion from income of interest in connection with the education bond program (i.e., certain Series EE and I bonds).