Why January Tax Decisions Can Affect College More Than You Think

It is probably not news to anyone that tax code is quite confusing. If you feel like making decisions about when to sell certain assets, when to realize certain gains, and when to withdraw from what investment accounts are confusing and intimidating, you are not alone. A major cause of this intimidation is because not only does this add to a big tax bill the following April, but it can also affect qualification for other benefits in the economy. One of these areas is college planning. In particular, qualification for need-based aid on the FAFSA. It is important that every parent understands their base year, and taxable events that may affect their FAFSA.

To begin, what is a family’s “base year?” This is the tax year that you will use to submit family income on FAFSA. To simplify it as much as possible, it is January of a student’s sophomore year to December of their junior year. In other words, the full tax year before they become a senior. This means for any families with current sophomores, 2026 will begin your base year. Any income decisions a family makes during their base year will modify how much need-based aid they may qualify for.

It is crucial that each family know their base year and be conscious of anything that may affect their taxable income. It goes without saying that a family should never reduce their employment income. However, there are other items that can be changed to consider. As an important disclaimer, you should always consult with your tax professional to understand the cost-benefit of these items and ensure you take a holistic approach when making these decisions.

A common mistake many families make is selling stock options in their base year. A common joke in the financial planning business is that the home renovation industry would go out of business if stock options did not exist. However, this is relatable because many families will sell stock options to do exactly that. Selling this stock is a taxable event and will increase your income in your base year.

Another very popular topic in recent years has been the benefit of Roth conversions. There are certainly many benefits to doing these in the long run and you should always consult your advisor about the cost-benefit tradeoffs. However, remember this will increase your taxable income and if done in your base year, could reduce your need-based aid.

Another item to be vigilant of is any low-basis stock or investment property you are considering selling. Remember, this too can potentially lower your need-based aid if done in your base year.

Knowing your base year and remaining cautious of income items you can control have the potential to increase your qualification for need based aid. It is important to consult with a professional to ensure you are doing what is in your best interest for your family’s particular situation. A+ College Planning is always happy to be a resource in these decisions.

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This article is purely for educational purposes and is not intended to provide any financial or tax advice. All readers should consult their financial professionals before making any tax or income decisions.