Hidden Income: Beyond the AGI

Lisanne Masterson

Director, Financial Aid

Brevard College

828.882.8487

lisanne@brevard.edu

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

First Things First

• Verification– Includes reconciling conflicting information

• Professional Judgment– Special Circumstances

• Institutional Methodology

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?

Purpose (Why?)

• What is your purpose in calculating

an Institutional Methodology?– Limited resources, equity….

• Are you looking for just hidden

income or personal “choices”?

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

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

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

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

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

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

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

Schedule D

• Capital Gain/LossDistinguish Between “Paper” Losses and

Actual Losses (i.e. Passive vs.Non-passive Income)

Actual Gain/Loss Within That Calendar Year?

Schedule E

• Supplemental Income/Loss• Part 1, Rental Real Estate

– Are there any assets?– Depreciation

• Parts 2 & 3, Income/Lossfrom Partnerships, S Corps,

Estates & Trusts» NOT income/wages» Non-passive Loss, Schedule K-1

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

Income/Tax Form/Documents

Finances 1040 DocumentationEmployment

Wages

Sole-Proprietorship

Line 7

Schedule C

W-2 Form

Accounting Books

Trade/Business

Partnership

S Corp

Schedule E

Schedule E

K-1 of Form 1065

K-1 of Form 1120S

Investment Income

Interest/Dividend

Capital Gains

Rentals/Royalties

Trust Funds

Schedule B

Schedule D

Schedule E

Schedule E

Form 1099 INT/DIV

Form 1099-B

Accounting Books

K-1 of Form 1041

Income/Tax Form/Documents

Retirement Funds

Pension/Sharing Plans

IRA

Non-Qual. Compensation

Line 16

Line 15

Line 7 or 16

Form 1099R, Broker/Bank

Broker/Bank

W-2, 1099-B, Broker/Bank

Education Funds

Hope/Lifetime Learning

Qualified Tuition

Line 49

N/A

Form 1098-T

Broker/Bank

Personal Expenses

Medical

Student Loan Interest

Mortgage

State Income Tax

Property Tax

Schedule A

Line 33

Schedule A

Schedule A

Schedule A

Bank

Lender statement

Form 1098

W-2, Bank

Tax Assessment statement

QUESTIONS!