Should I defer income for the FAFSA?

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Q. My small business gets payments once a year on annual contracts, usually in the summer. I can defer these payments, and I have a college junior. With recent changes to the FAFSA, does it make sense to defer everything to 2017 if I can? — Planning ahead

A. Let’s first discuss the FAFSA changes.

Right now, the soonest families can complete the FAFSA is in January, which means they can make estimates on their prior year’s income when they complete the forms.

But with the upcoming changes, families will be able to complete the form three months earlier. Income estimates won’t be available, so applicants will submit data from the prior year’s tax return.

That’s why you’re thinking that delaying your income will make you “look better” on the FAFSA and your student might qualify for more aid.

In your case, 2015 tax information will be used for the 2016 FAFSA, but it will also be 2015 that’s used for the 2017 FAFSA.

Your strategy is not that simple, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

“The calculation for figuring out financial aid is complicated and involve many factors, only one of which is parental income,” Hook said.

Plus, if your business is on the accrual basis for recognizing income — which means your business recognizes income when it is earned and not when it’s received — deferring the receipt of income won’t help, Hook said. That compares to if you have a cash basis business, which recognizes income only when it’s received.

“I would question the ethics surrounding delaying payment from a customer or a client to be able to qualify for financial aid,” Hook said.

You didn’t say if you have any younger kids and more FAFSA forms to complete after your current college student graduates, but this is important: if you deferred all your income to 2017, that may help you in one year for financial aid, but you have to complete the FAFSA every year. Eventually, the deferred payments will catch up with your financial aid forms, and when you apply for aid for the 2018-2019 school year, you could end up with far more income than you would have had if you simply took your income in the year you truly earned it.

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This story was first posted in February 2016. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.