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What Kind of Income Is Exempt on FAFSA?

by Sara Mahuron, Demand Media

    Income is factored into the equation to determine how much financial aid you'll get. You're required to disclose your income, and your parents' income if you're a dependent student, on the Free Application for Federal Student Aid. Disclose only that income you are required to report -- exempt income should not be reported and isn't used to calculate how much you can afford to pay for school.

    Reporting Income

    The FAFSA asks for income information from your prior-year Internal Revenue Service tax form. This information is used to predict how much you'll earn during the award year. You can use the IRS Data Retrieval Tool to upload your tax information to your FAFSA directly. Report any income earned from work. This includes wages, salaries and tips. Also report other taxable income, such as interest income, dividends, capital gains, unemployment compensation and rents. The FAFSA uses your adjusted gross income, so the income you report will be reduced by any IRS-allowable adjustments, such as payments to an IRA or half of the self-employment tax.

    Excluded Income

    Non-taxable income, combat pay and government assistance is generally excluded from the FAFSA as income. This can include veteran's education benefits, the value of on-base housing, low-income housing subsidies, foster care payments, adoption assistance payments, Native American per capita payments, heating assistance, cafeteria plans, Social Security benefits, Supplemental Security Income, Workforce Investment Income and some foreign income. Additionally, some of your taxable income is not considered in the FAFSA's calculation. This includes the value of education tax credits, child support payments and work-study or other need-based work programs.

    Exclude In-Kind Benefits

    Don't report certain in-kind benefits. This includes the value of friends and family members allowing you to live with them for free or feeding you. Other in-kind support includes food stamps, the WIC program, free or reduced school lunches and rollover pensions. In-kind benefits that aren't earned by work don't need to be reported. Those in-kind benefits you receive as compensation must be reported.

    Selected for Verification

    If your income is significantly low or even zero, this may raise a question. It takes some money to live, so an unusually low or non-existent income signals there may be an error on the FAFSA. In these situations, you're more likely to be selected for verification. You will be asked to explain how you pay for your living expenses if you don't earn any money. You may be asked to fill out a form and select different types of exempt income you use to pay for the cost of living.

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    About the Author

    Sara Mahuron specializes in adult/higher education, parenting, budget travel and personal finance. She earned an M.S. in adult/organizational learning and leadership, as well as an Ed.S. in educational leadership, both from the University of Idaho. Mahuron also holds a B.S. in psychology and a B.A. in international studies-business and economics.

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