Did you know the Free Application for Federal Student Aid (FAFSA) uses your prior-prior-year income to calculate financial aid eligibility? This means that if your child is graduating from high school in 2027 and going to college, your 2025 income will be counted by FAFSA. Here is what is included as income, either assets or investments:
Counted as Income
These amounts are included on the FAFSA and may reduce your aid eligibility:
- W-2 Income – Yes. Anything reported on your tax return counts.
- Pre-tax IRA Contributions – Yes. These are deducted on your tax return, so they get added back.
- Roth or Other Nontaxable Distributions from Retirement Accounts – Yes. Must be reported if shown as income on your tax return.
- Pre-tax Contributions to Self-Employed Plans (SEP IRA, SIMPLE IRA, Solo 401(k)) – Yes, if reported on Schedule 1 of your tax return.
- HSA Contributions Made Directly (not via payroll) – Yes. These reduce your taxable income but are added back on the FAFSA.
- Housing or Living Allowances (for military or clergy) – Yes, unless the military member lives on base.
- Untaxed Disability Benefits (including veterans’ non-educational benefits) – Yes.
- Dividends and Interest from Non-Retirement Accounts – Yes, even if tax-free.
- Roth Conversions – Yes, unless it’s a nontaxable backdoor conversion classified as a rollover.
- Nonqualified Withdrawals from 529 Plans – Yes, and subject to penalty.
- Taxable Transactions in UTMA/UGMA Accounts – Yes, income to the student (though gains below ~$9,500 are typically protected).
- Education Tax Credits (AOTC, LLC) – Reported to adjust for federal taxes paid (not penalized, but must be entered).
Not Counted as Income
These amounts do not count as income on the FAFSA:
- Roth or Other Non-Deductible Retirement Contributions – Already included in AGI.
- Pre-tax Salary Deferrals to 401(k), 403(b), or Employer Plans – Not added back on the FAFSA (but are on the CSS Profile).
- HSA Contributions via Payroll – Excluded; not added back. If not contributing through payroll, then it counts as income.
- Work-Study Earnings – Not income. FAFSA subtracts them automatically.
- Taxable Scholarships – Not treated as income for aid purposes (but must be manually adjusted after importing taxes).
- Non-Taxable Rollovers Between Retirement Accounts – Not income; verify line 4a on your return to avoid double-counting.
- Qualified 529 Withdrawals – Not income (another reason 529s are great for college savings).
- Child Support Received – Not income; reported as a parent asset.
- Untaxed Social Security Benefits – Not income, even if received by the student.
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