- The parents have an informal separation but not a legal separation or divorce. An informal separation looks like this: parents do not live together and have separate residences. In this case, they would file income tax returns as married but the FAFSA as separated.
- The parents were married on the last day of the tax year reported on the FAFSA but divorces or separated between then and the FAFSA application date. Under this circumstance, the parents would file income tax returns as married (either jointly or separately) but would file the FAFSA as divorced or separated.
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. Marital status on the Free Application for Federal Student Aid (FAFSA) does not necessarily have to match the status on federal income tax returns. The most common reasons one might filed a federal income tax return as married but separated on the FAFSA include: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 that parent’s 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 their 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 what 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).
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