Which Tax Return for FAFSA 2021
Which Tax Return for FAFSA 2021
Filing tax returns when on a wage or periodic income seems to be a straightforward encounter. However, how you handle that with regard to federal financial reward is a bit different. Any financial aid that you receive from the government comes with unique tax consequences. Most students typically apply for the Free Application for Federal Student Aid (FAFSA). You need a peculiar approach when filing a tax return for FAFSA 2021.
Before we look into filing a tax return for FAFSA 2021, first we need to understand the kind of tax information when making the application for this aid. When applying for FAFSA, you are often required to provide your tax information. The essence of this information is to let the government understand your financial situation so that they know the kind of financial assistance to extend to you.
The person whose tax information is needed when completing FAFSA matterS. Students who depend on their parent will need their parent’s tax return. On the other hand, if you have personal income, you may have to file an incoming tax return and depend on that information when applying.
Filing a Tax Return for FAFSA 2021
Each type of financial award extended has unique consequences and impacts your federal tax return in a different manner. You need to make the following considerations:
Pell grant does not classify as taxable income
If you got a Pell grant, the amount awarded is not added up as taxable income except if the funds were used for unapproved purposes. For the Pell grant to remain tax-free, the recipient should meet all requirements and should be using the funds only for fees, tuition, equipment, and supplies.
Those who use some of the amount awarded to cater for the room, school-related travel expenses, and the board must include the portion of the grant used in the expenses while filing taxes. For example, if you travel to your permanent home and pay for the transportation using the Pell grant, the amount in question is considered taxable income.
When you use some of your Pell grant money on non-qualified education expenses, you should be aware of how much of the Pell grant needs to be reported on the tax return. Suppose your expenses in the school’s records are $4,500 and you receive a $5000 Pell grant, you will have to report $500 in your tax return because you only incurred $4,500. The $500 is reported under the wages and salary line and is marked as SCH.
Please note that reporting the Pell grant as taxable income does not mean you will have to pay tax on it. Other factors like the amount reported, deductions, applicable credits, and individual’s filing status have a role to play.
Exclude Any Government Loans from Taxable Income
When applying for a student loan, you will be required to repay the amount in full alongside associated interest. As a result, even though FAFSA indicates that these loans are part of the “award” extended to you, they should not be included in the taxable income. Later on, when you begin repaying the loan, you can be liable for a tax deduction if your income is not high enough and if the money in question was used specifically to take care of school-related expenses.
Student loans are not taxed as income, just like other types of loans such as mortgages, credit card spending, and personal loans (except when the loan is forgiven). Most credit cards end up getting repaid in full plus interest, hence no need for taxation. The IRS classifies student loans as debt, not income, thus it is tax-free.
The only time you will have to pay taxes on student loans is when you receive forgiveness. If qualify for the student loan forgiveness program and satisfy all the requirements, the remaining amount on the student loan may be subject to taxes as income. Your chosen repayment plan impacts the taxation and can easily amount to thousands of dollars in taxes owed.
Work-Study Award Earnings are Included
Some of the awards associated with FAFSA include the option to undertake a part-time job while studying. Even if the income earned is aimed at easing the burden of college education, the money received is taxable just like other employment earnings. When filing your tax returns, you will need to declare the amount on the appropriate wagers and income section.
When undertaking the work-study, your employer will give you the W-2 in which you indicate all the needed information for completing the 1040 Form. Some students may feel confused about whether or not they should file tax returns. In such a case, you could refer to the IRS Publication 1040 Instructions for a detailed explanation of what to do.
All earnings made from the work-study must factor in FICA taxes (Social Security and Medicare) unless:
- You are currently under full-time college study
- You work less than 20 hours per week
Anybody working more than 20 hours a week agrees that FICA taxes will be withheld on their behalf.
Even as we indicate the work-study income is taxable, there are exceptions to the rule. Tax exemption allows you to get your work-study tax free provided you enroll in certain programs. The best approach would be to speak with a financial aid expert to gauge whether or not you qualify and bring up any additional work-study questions or opportunities. But do not count much on tax-free work-study because it rarely happens. With a little bit of luck, you may get tax-free work-study income thanks to involvement with certain nonprofit organizations, government agencies, or some types of health programs.
Closely Look at Any Financial Rewards Received from the State
Most students who submit FAFSA end up getting additional financial assistance. Any awards that you get from the state are liable for federal income tax as other awards that the federal government provides. For instance, if the state gives you a grant that you do not repay, that will be handled as a Pell grant and you will be required to use it in a given manner. Remember that any state-sponsored student loans are not included in the taxable income bracket.
Do not forget that FAFSA awards are treated in the same manner even if you withdraw from college at a later date as long as the funds were specifically used for college expenses.