Parents of seniors are filling out FAFSA applications right now, but if you’ve got a sophomore or junior in high school, then it’s time for you to start planning now so that you get the best possible financial aid later.
Here’s the main thing: if your child is a junior right now, then the income that you make this year will be the income reported on the FAFSA when she’s a senior. If your child is a sophomore, it will be next year’s income.
Why does that matter? Bottom line: the higher your income, the less financial aid you’re going to receive. If your child is already a senior, it’s too late to make any adjustments, the year is already over.
So if you’ve got a junior, you want to make your income look lower. If you’ve got a sophomore, you might want to move up your income for this year, to reduce it for next year.
For example: let’s say you’re a small business owner. One of my favorite strategies is to prepay business expenses in December to reduce my taxable income for the year. You can prepay up to a year’s worth of expenses. This is a smart move when your child is a junior. If you’ve got a sophomore, you might want to hold off on that to take the income hit sophomore year—when you’re not filing the FAFSA so that you can push more expenses into junior year which is the income year for the FAFSA.
Another example of future planning is when to take your capital gains on the sale of stocks. Now you’re going to want to make good choices, sometimes you’ve just got to sell because you need to sell and the time is right. But if you’ve got a choice, taking the gain is better in your child’s sophomore year than in the junior year. Remember, if you’ve got capital losses that are more than your gains, you can deduct up to $3,000 to offset your regular income. Anything more than a $3,000 loss will just be carried forward to your next year’s tax return.
One of the things that can really mess up your income during FAFSA time is taking a distribution from your retirement account. Sometimes things happen and you just don’t have a choice, but if you’ve got an option to take a distribution like that during the sophomore year instead of the junior year it will help to keep your income down for the FAFSA filing.
Now you need to realize that you’re going to be filing FAFSA applications for four years, so you can’t artificially reduce your income for four whole years. But getting that first year aid package off to a good start can help set the tone for the next four years.