Hidden Income: Beyond the AGI

1. Hidden Income: Beyond the AGI Lisanne Masterson Director, Financial Aid Brevard College 828.882.8487 lisanne@brevard.edu

2. Session Objectives • Who, What, Why, How & When • Institutional Methodology • Purpose • Policies & Procedures • Income vs. Assets • Documents • Tax Returns • Depreciation • Passive vs. Non-passive Loss • Business Balance Sheet & Statement of Owner’s Equity

3. First Things First • Verification • Includes reconciling conflicting information • Professional Judgment • Special Circumstances • Institutional Methodology

4. Who, What, Why, How & When • Why make these changes • Write policies and procedures to match your purpose • Used only for calculating an EFC using Institutional Methodology • Reviewing income, assets or both?

5. Purpose (Why?) • What is your purpose in calculating an Institutional Methodology? • Limited resources, equity…. • Are you looking for just hidden income or personal “choices”?

6. Institutional Methodology • Remember, this is not “verification” & does not change federal eligibility • Institutional policy backed by research • Calculate internally or externally? • The key is P&P & consistency

7. Policies & Procedures (What & How) • Type of changes you will make • Income • Assets • Who will make the changes • What process will you use to make changes • How/will the student be notified • Consistency

8. Federal Tax Return • Line items with potential “hidden income” • 8a: Interest Income (Schedule B) • 9a: Dividend Income (Schedule B) • 12: Business Income (Schedule C) • 13: Capital Gain/Loss (Schedule D) • 17: Rental Real Estate, Royalties, Partnerships, S Corps, Trusts (Schedule E) • 21: Other Income (Foreign Income Exclusion) • Personal “Choices” – Schedule A

9. Supplemental Schedules • Not required for verification • If you have them, you must resolve conflicting information • They may help in making professional judgment decisions, as well as finding hidden income

10. Schedules A & B • Schedule A – Itemized Deductions • Medical/Dental Expenses • Home Mortgage Interest • Gifts to Charity • Schedule B – Interest & Dividends • 1040 or 1040A, Lines 8a/8b & 9a/9b • 1099-INT; 1099-DIV • Asset

11. Business Financial Statements • Income Statement • Revenue – Expenses = Net Income • Statement of Owner’s Equity • Beginning Capital • Net Income • Withdrawals • Ending Capital • Balance Sheet • Assets = • Liabilities + Owner’s Equity

12. Schedule C • Profit/Loss From Sole Proprietorship • Distinguish Between “Paper” Losses and Actual Losses (i.e. Depreciation – Part 2, Line 13) • Request Business Financial Statements • Net Profit/Loss, Line 31 => 1040, Line 12

13. Schedule D • Capital Gain/Loss Distinguish Between “Paper” Losses and Actual Losses (i.e. Passive vs.Non- passive Income) Actual Gain/Loss Within That Calendar Year?

14. Schedule E • Supplemental Income/Loss • Part 1, Rental Real Estate • Are there any assets? • Depreciation • Parts 2 & 3, Income/Loss from Partnerships, S Corps, Estates & Trusts • NOT income/wages • Non-passive Loss, Schedule K-1

15. Schedule E • Partnerships & S Corporations • No tax at entity level but tax at partners’ level • Form 1065 – US Return of Partnership Income) => Schedule K-1 => Schedule E => 1040 Line 17

16. Income/Tax Form/Documents

17. Income/Tax Form/Documents

18. QUESTIONS!