Going forward college aid will computed based on “prior prior year” income instead of “prior year”. This means that current high-school sophomores who will graduate in 2018 will 2016, not 2017, as the base year in reporting family income on their first FAFSA form (Free Application for Federal Student Aid). Since student financial aid generally increases as family income decreases, the idea is to strategically manage family taxable income lower.
Families with Class of 2018 students will want to consider the following:
- Look for opportunities to shift 2016 income into this year and delay deductions.
- For example, parents of sophomores that are considering a Roth IRA conversion may want to do this before year-end since this boosts taxable income.
- It would not be wise to prepay the January mortgage and property-tax bills in December (remember, we want to delay and maximize deductions into 2016).
- If you receive an annual bonus, see if it’s possible to receive that bonus by December 31st instead of January.
- Impacted families that were planning on selling a taxable investment in 2016 should consider moving faster and locking in the capital gains into 2015.
- Parents who own businesses could speed up billing to pull payments into 2015 and delay deductible purchases until next year. They could also wait until 2016 to setup and contribute to a simplified employee pension plan.