FAFSA Tips and Post-Harvey Aid

It’s time to be thinking about Federal Student Aid. If you need help filling out the FAFSA form, please read on or give me call. Also below, I unpack a few of the tax implications of a House bill designed to provide hurricane and wildfire relief.

Let’s begin.

Helpful Tips on the FAFSA

Do you have children in college? Then the Free Application for Federal Student Aid is the form that you will complete if you want to enter the federal financial aid system. Go to www.fafsa.ed.gov to electronically file if you want a Stafford Loan, a work-study job for your student on campus, a federal grant, or maybe even a little scholarship money from the endowment. You will need your 2016 Form 1040 and a list of your assets. If you need help, please give me a call at (713) 785-8939.

U.S. House Approves $36.5 Billion Aid Package

Last Thursday, October 12th, the House approved a bill that will provide Hurricane Harvey, Irma, and Maria relief as well as wildfire relief, and will bail out the financially troubled National Flood Insurance Program. The bill now awaits consideration by the Senate.

The bill also includes a few tax changes that might benefit you. This legislation allows you to take a casualty loss from these storms without having to itemize. You will also be able to deduct your uninsured personal losses in excess of a $500 threshold without regard to the 10% of adjusted gross income offset that generally applies to get that deduction. I don’t need to tell you how big that could be.

Also of note, the 10% penalty on pre-age-59 ½ withdrawals from retirement accounts is waived, as long as the IRA or retirement plan withdrawals are not greater than $100,000. The regular income tax due on these distributions can be paid over three years. You can also borrow more from your 401(k), up to $100,000, and loan repayments can be deferred. These are some of the changes that may affect you.

Tax Records Lost During Harvey?

If you lost your tax records during the hurricane you can use the Get Transcript tool on IRS.gov to print a summary of your W-2, 1099, and 1098 information. A tax transcript is a summary of key information and not a copy of your return. If you want a copy of an actual return, you must file Form 4506. If you want a copy of your transcript by mail, then you must file Form 4506-T. To expedite the processing and waive the customary fees, write “Hurricane Harvey” on the top of the form.

How Does a Uniform Gift to Minors Account Affect Federal Financial Aid?

I teach a free parent seminar called “Paying For College,” and parents often ask me about Uniform Gift to Minors Accounts. These accounts may sound like a good idea, and they’re fine for income or estate tax planning. But when it comes to federal financial aid planning, a Uniform Gift to Minors Account is a terrible idea.

Let me explain.

Generally, children cannot transact financial business on their own –other than a simple bank account – without the appointment of a guardian. So in the 1950s, the Uniform Gift to Minors Act (UGMA) was created. The goal was to draft a model law for states to adopt to provide a convenient way for people to make gifts of money and securities to minors. In 1986, the Uniform Transfer to Minors Act (UTMA) was created to expand the types of property that could be transferred to a minor, e.g. real estate and limited partnerships.

Under the UGMA/UTMA, parents can make gifts to children through the use of custodial accounts. Custodial accounts are basically simplified trusts that are created by statute instead of through trust agreements. In lieu of a trustee, a custodian is named to manage the property until the age at which control passes to the child. Parents making gifts to their children can name themselves or another adult as custodian. The custodian has a fiduciary responsibility to handle the assets in a prudent manner for the child’s benefit.

When the child reaches a specified age, he or she can claim all of the account assets – even if that is against the wishes of the parent donor or the custodian. In Texas, the age of majority is 21. Gifts to a child under UGMA/UTMA constitute completed gifts for gift tax purposes and qualify for the annual gift tax exclusion, which in 2017 is $14,000 per parent or $28,000 if from both parents. Income earned on the assets in the custodial account is taxable to the child and subject to the “kiddie tax” if the child is under 24.

What does that mean? For federal financial aid planning, gifts to a child under UGMA/UTMA count as that child’s income and assets for assessment purposes for the Expected Family Contribution. And of course, the higher the Expected Family Contribution, the less likely a child is to receive financial aid.

Questions? I’d love to hear from you. Please feel free to reach out to me via email, or call me at my office at (713) 785-8939. If you’re interested in learning more about my “Paying for College” seminar, I’d be happy to discuss it with you.

Thank you for reading,
Robert Stevenson, CPA