The Free Application for Federal Student Aid (FAFSA) looks at a student's available assets and determines the amount of money that student is qualified to receive to help pay for college. It is important that the FAFSA forms are filled out accurately, including recording all appropriate income. If income is not properly reported, a student may be denied aid.

Student Income

Any money a student earns during the previous year is counted as income on the FAFSA form. One of the largest contributions that the government expects you to make toward college tuition is from your own income and assets. The government typically calculates that you will spend 20 percent of your income on your tuition, while parents are expected to contribute up to 5.64 percent of their income. However, any amount that falls into the Earned Income Credit (EIC) does not qualify as income. If you fall under the specific income guidelines for the EIC, your taxable income is lowered based on how much you made and how many dependents you have. If you or your parents qualify for this credit, you must only claim your adjusted gross income as figured by the IRS on your taxes, which is lowered by your EIC amount.

Parent Income

In addition to your income, the government requires the income of any parent that lives in the household. If your parents are divorced, the income for the parent with whom you live for a larger portion of the year is the one you should use. However, if the parent with whom you are living has remarried, you must also add the spouse's income. Because so many applicants were falsely claiming their parents were not living together to create a larger need, FAFSA typically requires that a copy of the divorce decree is submitted with applications.

Work Study and College Aid

In some cases, you must also count a work-study job, scholarships or grants that were considered taxable on income taxes as income. While these items are used to pay for college, they are considered to be income by FAFSA standards. The purpose of FAFSA is to determine how much you and your parents can feasibly pay toward your college education. Money you receive through a work-study program or other college-aid plan counts as money that can be paid toward school and thus becomes FAFSA-eligible income.

Capital Gains

Any money that has been gained by your family through the sale of stocks or bonds is considered income that you must record on a FAFSA form. This income is required, even if the sale was not intended to fund college. Therefore, it is advised that if the money your family would gain from the sale of stocks and bonds is not going to be used toward college, the sale should be delayed until after your junior year of college, after the last FAFSA form has been filed.

Retirement Withdrawals

While all retirement funds are exempt when determining assets that lower financial-aid qualifications, any money that is withdrawn from these funds during the college years is considered income. If you must take the money out for any reason, it is best to wait until after the FAFSA application is filed.