Client comes to me today and says that one of her friends said that "her CPA told her" not to claim her daughter as a dependent because she would then qualify for more financial aid. I didn't know this was a determining factor and told her that I felt that may be bad advice because she would lose the ability to get the Hope/Lifetime Learning Credit and the dependency exemption. Any thoughts on this? I plan to do some research today, but wanted to know if anyone else had heard this.
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It may be true.
I have attended tax seminars in the past where speakers compared tax benefits to financial aid benefits, and illustrated how sometimes our seeking the lowest tax for a client can cause them to lose out on financial aid.
My eyes sort of glazed over. I have enough headaches keeping up with the tax rules. Now I am supposed to know all the ins and outs of financial aid? I don’t think so. You want financial planning advice? Go to a financial planner. You want financial aid advice? Go to your school counselor. You want to know about Social Security benefits? Talk to Social Security. You want tax advice? Come see me.
Why is it we are the only industry where people expect us to know everyone else’s job, along with our own? -
I agree, in part
Some of what we do is tied to other financial situations (retirement planning comes to mind), but college financial aid is something that I don't understand enough of.
Should I direct her to the college financial aid office to answer her question? I just don't want to look "dumb" because "her friend's CPA" knows more than I do about this particular situation.Comment
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The daughter works part time.
Supposedly, according to her friend's "CPA" the daughter should file her own return and claim her own personal exemption. If she does this, even though she lives with the parents, the parent's pay and assets are not considered part of her support for financial aid.Originally posted by Larmil View Post
Sounds wierd to me, but I don't pretend to understand financial aid rules.Comment
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I am not an expert either, however my understanding of Financial Aid is that if a student/dependent is under the age of 25 it doesn't matter if their parents claim them or not. They must still include the parents income on the Financial Aid form.
Some states allow students to establish residency in the states if they spend enough time in the state, no matter where the parents live. In that case it could possibly be advantagous to file independent of the parents but that is a state by state issue.Comment
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That makes sense, but
she wants to go to an in state private school, so it would be a mute point in this case.Originally posted by EA Carol View PostComment
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Same here, don't know the ins & outs on this one. But I had a look at some FAFSA stuff. Seems that "dependency" has a different definition for tax vs. fin aid. A dependent student for financial aid purposes is determined by some questions on the application. Here's where I got some info.
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However, you do understand tax rules and if the daughter claims herself when she could be claimed by the parents that's not correct. It's also financial aid fraud.Originally posted by JoshinNC View PostComment
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At the same time...
There is also no rule that says the parents have to claim the daughter if she is their dependent. TTB, page 12-3 explains how the parents choose not to claim an exemption so that the student can claim the Hope or Lifetime Learning credit (such as when the parent's income is too high to claim either).Originally posted by Davc View Post
I assume that is what the CPA meant. Nobody claims the kid, thus allowing financial aid to kick in. The loss of the dependency exemption could be far less dollar wise than what is gained in qualifying for financial aid. According to what I heard at a seminar, it is legit and isn’t considered financial aid fraud.Comment
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That CPA advise is nonsense. I became an "expert" when my son started college. I am a single mom and moved from Virginia to Montana when my son started college. He moved to Maryland, set never foot on Montana at that time. He supported and supports himself 100%, I didn't have any means to support him, reflected on my tax return.
He still was considered a resident of Montana for purposes of in-state tuition and financial aid goes strictly by income of parents and student, they don't care who gets dependency exemption. We consulted with the financial aid counselor and she made us very little hope that even in our situation my son would be aloud to be seen as "on his own". We won this one (was substance over matter anyway).
I just wanted to illustrate the financial aid situation. They are not stupid.Comment
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Not allowed
The daughter is NOT allowed to claim her own exemption is she CAN be claimed or her parents (or anyones) return.Originally posted by JoshinNC View Post
LarmilComment
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There are still "hardship" cases for financial aid
In cases where an undergrad actually DOES self-support, the student can complete a FAFSA without parent info, and petition the individual university to classify the student as a financially independent hardship case, which makes the student eligible for grants and other aid. Each university has its own standards for this classification, and some never allow this exception. This aid status is not normally "advertised", to reduce abuse of the system. In addition to the 25-and-over rule, there is also a Grad Student rule, and a Married rule, both of which allow FAFSA financial independence and eligibility for aid. I believe grad students are not permitted grant money though. None of these situations seem to apply to the case at hand, but thought I would chime in anyways!
I have prepared many returns over the years with the parents NOT claiming the child exemption, and not taking the education credits, because income limitations yielded little or no benefit to parents. The student with income tax liability can then get some benefit from the education credits.Comment
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Financial Aid
The FAFSA calculation looks for only about 6% of the parent's resources to be used to pay for college and about 36% of the student's resources. So, it can make only a small difference in financial aid awards in some cases. Also, the FAFSA definition of parent is the parent the student lives with the most and not necessarily the one claiming the student on his/her tax return. So, the student frequently has a better chance of qualifying for aid by spending down his own assets, buy a car, computer, pay car insurance, even pay for freshman year, so he'll have fewer assets when applying for next year.
Our daughter's friend had lived with her aunt and uncle for several years since her dad was hospitalized/not working and her abusive mother was no one knew where. Aunt and uncle offered to use their (less beneficial) information for FAFSA since no one had accurate information on either parent. Fought a long fight. Finally had a days long hearing in a distant city and obtained a judgment that student was not a dependent for FAFSA purposes while her parents were missing. But, they did that in order to complete the paperwork or else student would not have been considered for aid with incomplete forms!
Talk to the college financial aid department to get specific information for that student and her choice of college instead of a generic seminar speaker.Comment
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