reception-bg / Getty Images
If you are applying for college financial aid, you should be sure to remove unemployment benefits from your income to ensure the highest aid available. This could be tricky due to the confusion around tax filings and the financial aid application process.
Learn: 7 financial habits that improve your daily life
See: Do you have $200 wedges lying around? It’s worth checking your spare change
As The New York Times reported, unemployment benefits are generally considered income when calculating a student’s eligibility for financial aid. But as part of COVID-19 relief packages, the US government allowed Americans earning less than $150,000 a year to exclude unemployment benefits up to $10,200 per recipient from their 2020 taxable income.
The potential problem lies with the Free Application for Federal Student Aid (FAFSA), which students and their families fill out to apply for financial aid. The FAFSA form is what you need to receive federal Pell grants and need-based student loans. States and colleges also use it to award their own financial aid.
The FAFSA for the 2022-23 academic year became available on October 1, 2021 and uses financial information from the 2020 tax year. Income for the 2020 tax year is generally reported on 2021 tax returns. .
This is where the confusion comes in. The federal relief effort that excluded unemployment benefits did not take effect until March 11, 2021 — after many people had already filed their 2020 tax returns and reported their unemployment benefits as income.
The IRS said it would automatically make corrections to taxpayers who had already filed tax returns and send them refunds if needed. However, there could still be issues involving first time filers who also use the IRS data retrieval tool to complete the FAFSA form. This tool allows FAFSA applicants to quickly transfer encrypted tax information into the online financial aid form, and students and families are encouraged to use it.
But because the tool transfers information from the original filings, data from early filers who did not claim the unemployment exemption will not reflect the IRS adjusted lower income. In the fall of 2021, the Federal Office of Student Aid issued a notice stating that early filers who used the data tool for the FAFSA would have higher reported income, which could reduce their eligibility for the federal assistance as needed.
Meanwhile, the IRS has warned FAFSA filers not to use the data tool if they file their 2020 tax returns and do not exclude any unemployment benefits from their earnings.
Student Loans: What Options Do You Have If You Can’t Start Paying Again?
More: How much do late payments affect your credit score?
So what can you do? If you had unemployment income in 2020 and you filed your tax return before March 11, 2021, you should contact your college’s financial aid office to have unemployment benefits removed from your income on the FAFSA .
More from GOBankingRates