Your tax return plays a big role in determining how much financial aid a college offers to your child. To get the most financial aid possible, you need to plan out any tax moves several years before applying.
Colleges look at the income and assets of the parents and the student when calculating the “expected family contribution,” which in turn is used to calculate a student’s need for financial aid. But schools don’t look at last year’s income. Instead they look at income reported two years before the start of the school year. Financial aid for the 2021–2022 school year, for example, will be based in part on how much adjusted gross income (AGI) is reported on your 2019 tax return.
Keeping AGI as low as possible can help result in a better financial aid package for the college student. Here are seven techniques that parents and future college students can use to lower their adjusted gross income:
- Avoid taking unnecessary distributions from IRAs and other retirement plans.
- Avoid selling stocks and investments with large capital gains, as this will increase your income.
- Consider selling investments that have lost value so you can take a capital loss, which in turn reduces your AGI.
- Consider selling rental property. In some situations, this can unlock accumulated passive losses and significantly reduce your AGI.
- Consider working abroad and claiming the foreign earned income exclusion. This can reduce your AGI by up to $105,900 for tax year 2019.
- Consider increasing contributions to a pre-tax 401(k) or 403(b) plan. This reduces your taxable wages, which in turn lowers your AGI.
- Consider making tax-deductible contributions to a traditional IRA, self-employed retirement plan, or health savings account. These deductions reduce your AGI.
As your tax advisers, we can help you figure out which strategies will work best for keeping your AGI as low as possible.