[Oasfaa] Verification Question

[Mc Conahay, Pamela K.]

Jonna,

Yes, you should go back to treating business/farm losses as zeroes when calculating income earned from work.  If I was the trainer at that workshop, I screwed up.  

I think the key thing here is for people to understand how the 'income earned from work' is used in the EFC calculation.   It does two things---allows the formula to accurately calculate a FICA allowance, and also drives the employment allowance.  

If you treat subtract the negative amounts on lines 12 or 18 from the positive total of wages earned from line 7, you won't be giving the parent/student an accurate FICA allowance in the EFC calculation.  

If you work at the mall and make $25,000 a year, you pay FICA on that $25,000.....even if you have a business loss of $10,000 on line 12.  You don't pay any FICA on that business loss, so it should be treated as zero when totaling up the income earned from work;  the correct income earned from work is $25,000.    

The accurate FICA allowance is $1912 (25,000 x 7.65%).  If you subtract the $10,000 loss from the $25,000 wages and put $15,000 as income earned from work, the FICA allowance is only $1147, and the person has $765 more in available income than is really true, incorrectly inflating their EFC.  

The same logic holds true for the employment allowance (which is supposed to reflect the 'cost of working' like gas, clothes, lunch, etc.).  In order to earn $25,000 at the mall, the correct employment allowance should be based on the $25,000.  It didn't cost you any less to get to work and earn that $25,000 just because your side business went in the hole.  

Pam McConahay
Associate Director, University of Oklahoma Financial Aid Services
pmcconahay at ou.edu
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-----Original Message-----
From: oasfaa-bounces at lists.onenet.net [mailto:oasfaa-bounces at lists.onenet.net] On Behalf Of Jonna Raney
Sent: Monday, November 09, 2009 4:45 PM
To: oasfaa at onenet.net
Subject: [Oasfaa] Verification Question

Years ago, we treated amount on line 12 or 18 on the 1040 as zeroes. Then, we went to a training a few years ago and they specifically said to subtract negative amounts when calculating income from work.  So, we started subtracting the negative amounts.  However, a colleague at another school emailed today and had found the following in the regs...

"Income earned from work and the IRS 1040 form
The FAFSA instructs the applicant to sum lines 7, 12, and 18 of the 1040 
form and box 14 [code A] of Schedule K-1 (Form 1065) as an option for 
determining the income earned from work. But when the values of lines 12 
or 18 or box 14 are negative, this will reduce the total and can wrongly 
affect the Social Security al-lowance. If values from lines 12 or 18 or 
box 14 are negative, treat them as zero when determining the income earned"

So, now I think we need to go back to treating them as zeroes except that the FAFSA simply says to total lines 7, 12, 18 and Box 14A, etc. and doesn't instruct to treat negatives as zeroes so I'm sure most will subtract them because that's how you logically total a negative.  Right?

So, what do you do?  I can take it if everyone tells me we're doing it incorrectly.  :-) I would rather hear it from you all than from a program reviewer.

Jonna