If you are applying for college financial aid, you need to make sure to remove unemployment benefits from your income to guarantee the highest aid available. This could be tricky because of confusion surrounding tax returns and the financial aid application process.
As The New York Times reported, unemployment benefits typically count as income when calculating a student’s eligibility for financial aid. But as part of COVID-19 relief programs, the U.S. government allowed Americans earning less than $150,000 a year to exclude jobless benefits of up to $10,200 per recipient from their 2020 taxable income.
The potential problem lies with the Free Application for Federal Student Aid (FAFSA), which students and their families fill out to apply for financial aid. The FAFSA form is what you need to receive federal need-based Pell grants and student loans. States and colleges also use it to award their own financial aid.
The FAFSA for the 2022-23 academic year became available on Oct. 1, 2021 and uses financial information from the 2020 tax year. Income from the 2020 tax year is typically reported on 2021 tax returns.
This is where confusion comes in. The federal relief effort that excluded unemployment benefits didn’t take effect until March 11, 2021 — after many people had already filed their 2020 tax returns and reported their jobless benefits as income.
The IRS said it would automatically make corrections for taxpayers who had already filed tax returns, and send them refunds if necessary. However, there could still be problems involving early tax filers who also use the IRS Data Retrieval Tool to complete the FAFSA form. This tool lets FAFSA applicants quickly transfer encrypted tax information into the online financial aid form, and students and families are encouraged to use it.
But because the tool transfers information from the original returns, the data for early filers who didn’t claim the unemployment exemption won’t reflect the lower, IRS-corrected income. In the fall of 2021, the Federal Student Aid office posted a notice saying that early tax filers who used the data tool for the FAFSA would have a higher reported income, which might reduce their eligibility for federal need-based aid.
Meanwhile, the IRS has warned FAFSA filers not to use the data tool if they filed their 2020 tax returns and didn’t exclude any jobless benefits from their income.
So what can you do? If you had unemployment income in 2020 and filed your tax return before March 11, 2021, you should contact your college financial aid office to have the jobless benefits removed from your income on the FAFSA.