With the rising cost of tuition and fees, many prospective students and their families find themselves financially stuck when it comes to applying for college. That’s why the burden of paying for college isn’t left only to students and their families. Colleges, the federal government, and other private sources share this responsibility through the Free Application for Federal Student Aid (FAFSA) and other financial aid.
When filling out the FAFSA, you’re required to report your adjusted gross income (AGI) and that of your parents in the financial information section. This guide will detail everything you need to know about adjusted gross income for FAFSA, including what it is and where to find it on your tax return.
What Is Adjusted Gross Income (AGI)?
Adjusted gross income (AGI) is your or your family’s income after accounting for certain deductions. Gross income includes your dividends, wages, capital gains, retirement distributions, business income, as well as other income. Adjustments to income are specific expenses that directly reduce your total taxable income. They include items such as:
- Educator expense deductions
- Student loan interest
- Alimony payments
- Contributions to a retirement account
Your AGI can’t exceed the gross income on your return. AGI plays a crucial role in determining your eligibility for financial aid when you’re applying for college support through the FAFSA, so it’s important to report it accurately.
How To Calculate Adjusted Gross Income for FAFSA
To calculate your AGI, the IRS requires you to complete your federal income tax return. They then provide detailed instructions that guide you through the process of calculating your AGI, including which deductions you can claim. Here are the steps you can follow to calculate your AGI:
- Determine your gross annual income
- Calculate your total deductions
- Apply the adjusted gross income formula
Determine Your Gross Annual Income
Your gross income is the sum of all the money you earn in a year before any deductions or adjustments. It encompasses a wide range of income types, including:
- Wages, salaries, and bonuses
- Commissions, tips, and overtime pay
- Self-employment income and business profits
- Partnership income
- Military pay and benefits
- Interest income from savings accounts, bonds, and CDs
- Dividends from stocks and mutual funds
- Capital gains from selling assets like stocks, bonds, or property
- Rental income from owning and renting out property
- Social Security benefits (considered taxable income)
- Unemployment benefits (considered taxable income)
- Prizes and winnings
- Alimony and child support (if received by the recipient)
- Jury duty pay
- Hobby income (if it exceeds certain thresholds)
Gross income doesn’t include:
- Gifts and inheritances
- Refunds of previously paid taxes
- Life insurance payouts
- Welfare benefits
- Canceled or forgiven debts
- Child support or foster care payments
- Disability payments
- Scholarships or fellowship grants
- Payment from the sale of your primary home
- Money from rolling over an IRA or retirement plan
Calculate Your Total Deductions
To find your AGI, you first need to identify the deductions that you can claim—specifically, your “above-the-line” deductions. These are called “above-the-line” because they appear on the first page of the 1040 tax form above the line where AGI is calculated.
In most tax software, you might find that the above-the-line deductions aren’t clearly separated from other standard deductions. Above-the-line deductions are claimed first because they’re adjustments to income—they reduce your gross income before any other deductions are made. Some of the common above-the-line deductions include:
- Contribution to traditional IRA
- Certain expenses for books and supplies incurred by teachers
- Interest on student loans
- Higher education expenses
- Contributions to Health Savings Accounts (HSAs)
- Retirement plan savings for the self-employed
- Self-employed health insurance deduction
- 50% of self-employment tax
- Certain expenses of performing artists, state officials, and Army Reserve members
- Moving expenses for Armed Forces members
- Penalties forfeited because of premature withdrawal of funds
Each of these deductions has requirements you must meet so you can deduct them from your gross income.
Apply the Adjusted Gross Income Formula
The formula for calculating your AGI is as follows:
AGI = Total (gross) income – above-the-line deductions
The FAFSA uses the Expected Family Contribution (EFC) formula to determine your financial aid eligibility. This formula incorporates your AGI, along with other factors, to assess your family’s ability to contribute towards your college expenses.
Does FAFSA Use AGI or Taxable Income?
The FAFSA uses AGI and not taxable income as the main income measure for determining your financial aid eligibility. Here’s why—AGI is your total income after subtracting certain allowable deductions, so it paints a more complete picture of your family’s financial situation.
Taxable income is your AGI minus additional deductions allowed by the tax code, such as standard deductions or itemized deductions. It represents the income you pay taxes on.
FAFSA uses AGI for three reasons:
- It focuses on earning capacity and reflects your family’s earning potential, which is crucial for determining their ability to contribute towards your college expenses
- Using AGI simplifies the FAFSA process by eliminating the need to calculate and report various deductions
- AGI ensures consistent evaluation across all applicants, regardless of their filing status or chosen deductions
Understanding AGI and calculating it accurately is crucial for unlocking college financial aid. However, calculating your AGI and representing it on the FAFSA requires revealing a lot of sensitive financial and personal information that we should protect. That’s where identity protection services come in, offering a layer of security for your sensitive data.
One such service is FreeKick, which continuously monitors the dark web, credit reports, and public records for any suspicious activity related to your identity. In case of identity theft, these services can assist with recovery efforts, credit repair, and insurance claims. This gives you peace of mind and reduces the risks of delay or denial of financial aid because of FAFSA identity theft.
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