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Resources > FAFSA > Understanding FAFSA Parent Income From Work—A Detailed Guide

Understanding FAFSA Parent Income From Work—A Detailed Guide

Filling out the Free Application for Federal Student Aid (FAFSA) is the first step towards determining whether college students qualify for federal student financial aid. Most students find the process of navigating the FAFSA overwhelming and confusing because of the many requirements it involves.

Part of these requirements is providing your parents’ income, and understanding what counts as FAFSA parent income from work can be tricky. This guide will break down everything you need to know about reporting parent income from work on the FAFSA to make sure your application is accurate and complete.

What Is Income Earned From Work on FAFSA?

The FAFSA requires information about the income of any parent living in your household while you’re applying to determine the amount of money you’ll receive as student aid. What counts as income earned from work on FAFSA is any compensation your parents receive for work that’s reported on their taxes. This includes but isn’t limited to:

  • Wages and salaries
  • Commissions and tips
  • Bonuses and overtime pay
  • Self-employment income
  • Partnership income
  • Capital gains
  • Dividends
  • Payments to tax-deferred retirement plans
  • Proceeds from the sales of assets
  • Retirement withdrawals
  • Veterans benefits

However, some types of income aren’t considered “earned” for FAFSA, such as:

  • Social Security benefits
  • Unemployment benefits
  • Welfare benefits
  • Gifts and inheritances
  • Veterans Administration education benefits
  • Employer contributions to retirement plans
  • Loan proceeds
  • Withdrawals/distributions from 529 college savings plans
  • Work-study payments

How To Find Parent Income From Work for FAFSA

Determining parent income from work and accurately representing it when filling out the FAFSA form requires some effort, but it’s a crucial aspect for making you eligible for financial aid. Some applicants underreport their parents’ income so that it will appear lower and help them receive a larger amount of financial aid. However, this is considered FAFSA fraud and is punishable by law. To avoid any negative consequences, make sure to accurately report parent income earned from work. Here’s how to find this information:

  1. Use the IRS Data Retrieval Tool (DRT)
  2. Estimate income for non-tax filers
  3. Provide supporting documentation

Use the IRS Data Retrieval Tool (DRT)

The IRS Data Retrieval Tool (DRT) is the easiest and most accurate way to transfer your parents’ tax information directly to the FAFSA application if your parents have already filed their federal tax returns. This prefills some questions on the FAFSA form, saving you the time you’d spend on manual entry and eliminating errors. Here’s how to use it:

  1. Access the DRT—Log into your FAFSA form and navigate to the Financial Information section. You’ll be presented with a number of questions to determine whether you’re eligible to use the IRS DRT. Select None of the above to gain access
  2. Follow the prompts—Enter your PIN and click Link To IRS. Your FAFSA will be saved, and you’ll be transferred to the IRS website. Fill in the requested information accurately. The DRT will prefill your parents’ income information based on their tax return

Estimate Income for Non-Tax Filers

If your parents weren’t required to file taxes under federal regulations, here are some reliable sources for gathering their income information:

  1. All W-2 forms
  • W-2 itemizes annual wages from your parent’s employer. If your parent didn’t retain a copy of their W-2, they can request a Wage and Income Transcript from the IRS
  • If you don’t have a W-2, you should use all earnings/income statements (taxed and untaxed, including disability statements, Social Security benefits statements, etc.)
  1. If your parent did any work, it should be indicated on the parent verification form and the non-filing form
  2. For foreign non-tax filers, use all wage statements for the tax year

Provide Supporting Documentation

If you can’t use the DRT or estimate income accurately, you must provide supporting documentation for your parents’ income. This can include:

  • Pay stubs
  • W-2 forms
  • 1099 forms
  • Self-employment tax returns
  • Partnership K-1s
  • Bank statements
  • Letters from employers verifying income

How To Answer FAFSA Questions About Parents’ Income

FAFSA’s sections that ask about the amount of your parents’ income from work usually refer to the federal tax return filed two years before the award year. For example, if you’re applying for the 2023/24 award year, you’ll use the 2021 tax return.

If your parents live together, you’re required to report both of their income information. If they live separately, report the income of the parent you’ve lived with for the past 12 months. You also need to find the scenario that best fits your parents’ tax filing status:

  • If your parent didn’t file taxes, you’ll use the information from their W-2 forms in the corresponding boxes
  • For a married parent who uses the IRS DRT to transfer information from a joint tax return into your FAFSA form, you must manually enter income earned from work. If your parents filed jointly, you’ll be asked to include income information from both parents
  • For an unmarried parent who uses the IRS DRT to transfer information into your FAFSA form, the answer to the question about their earnings will be “Transferred from the IRS.” If your parent filed a Schedule K-1 (IRS Form 1065), you’re required to report that information separately
  • If your parent is single, separated, divorced, or widowed but doesn’t use the IRS DRT to transfer their IRS information into your FAFSA form, fill in their total earnings from two years. You can calculate their earning amounts from their tax return, W-2s, or other earning statements

How Does Parents’ Income Affect Your Aid?

Your parents’ income plays a significant role in determining the amount of financial aid you receive for college. What most people don’t know is that the FAFSA doesn’t actually calculate the amount of financial aid you’ll be awarded, nor does it determine the type of aid you get. Instead, the FAFSA form acts as a data collection tool that gathers as much data as possible about you and your family’s income and assets.

With this information, FAFSA uses a formula defined by law to calculate your Expected Family Contribution (EFC). The EFC determines how much your family is expected to contribute towards your college expenses. This amount is then subtracted from the total cost of attendance to determine your financial aid eligibility.

Higher parent income generally leads to a higher EFC. This means you’ll be expected to contribute more towards your education, potentially reducing your financial aid package.

Lower parent income leads to a lower EFC. This makes you eligible for more financial aid, including grants, scholarships, and work-study programs. However, this may vary depending on the college’s financial aid policies, meaning the financial aid you receive from a college may be higher or lower than your EFC.

Tips for Accurate and Complete Reporting of Parent Income on the FAFSA

When reporting parent income on FAFSA, make sure you do it accurately to maximize your chances of receiving the financial aid you need to pursue your educational goals. Here are some tips to follow:

  1. Be transparent and accurate—Provide the exact amounts of income requested, regardless of the source. Don’t try to hide any income or fudge the numbers
  2. Use the available tools—Embrace IRS DRT, which is the most accurate and efficient way to transfer your parents’ tax information directly to the FAFSA
  3. Double-check your entries—Proofread your FAFSA carefully before submitting it to ensure all information is accurate and complete
  4. Seek help if needed—If you’re unsure about anything, don’t hesitate to reach out to your school’s financial aid office or the Federal Student Aid website for assistance

You should also be extra careful when filling out the FAFSA as it contains sensitive information such as your full name, date of birth, Social Security number (SSN), and so much more. If this information lands in the wrong hands, it can be used for fraudulent activities and damage your identity. With identity theft on the rise, taking safety precautions like enrolling in identity protection services can help keep your personal information secure. FreeKick by Austin Capital Bank is one such service that excels at safeguarding your identity to give you peace of mind as you navigate the FAFSA process.

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