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Follow this path to college financial aid

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in Small Business Tax,Small Business Tax Deduction Strategies

The cost of sending children to college these days is daunting. If you’ve been successful financially, you may think that you can’t qualify for any need-based financial aid. Think again.

If you correctly navigate the ins and outs of the financial aid game, you can still grab a piece of the pie, even with a relatively high income.

Advice: Improve your odds of securing financial aid by reducing certain income items with tax-smart planning.

Focus on the base year

To earn need-based financial aid from the federal government (including Pell Grants, Perkins Loans, Stafford Loans and work/study aid), high school students generally must file the Free Application for Federal Student Aid (FAFSA) form after Jan. 1 of the year in which they intend to enter college. All state—and many school-based—assistance programs also require the FAFSA.

Send the FAFSA to all the schools where your child is applying for admission. You then file a shorter version of the form—Renewal FAFSA—in subsequent years.

The family’s income and assets for the preceding year determine financial aid eligibility each year. But that first year— often called the “base” year—is especially important because it sets the base standard for your income. Plus, the initial financial aid determination may affect the decision on whether the child attends a particular school.

Strategy: File the FAFSA as soon as possible. Some schools hand out need-based financial aid on a first-come, firstserved basis (although other forms of financial aid may be available).

The FAFSA determines your level of aid eligibility using a complex methodology. The “poorer” you appear on paper, the more likely you are to earn financial aid.

That income calculation takes into account certain types of income from your tax return—most notably, your adjusted gross income (AGI)—but it doesn’t account for the amount of your itemized deductions. That little-known fact might affect your tax planning in the years leading up to the base year and beyond.

For instance, you might defer income for several years through investments in growth stock. On the other hand, accelerating itemized deductions provides no benefit from the FAFSA perspective.

8 moves to consider

Securing financial aid is only part of the overall equation. The tax moves you make, or don’t make, are often based on several factors. Still, all else being equal, consider using the following strategies in the base year to increase your chances of receiving financial aid:

1. Move funds into a company retirement plan, life insurance or both. Since you’re not expected to use those assets to pay for college, they don’t figure into your child’s financial aid calculation.

2. File a separate return for younger children. When you file an annual return for your family, don’t report the income from a child under age 14 on your own return (under age 18 for 2006 and beyond). That will inflate your AGI, reducing your chances for financial aid.

3. Hold capital assets that have appreciated in value. If you sell the assets in the base year, you’ll create capital gains, which will raise your income under federal financial aid methodology. So, if you need the proceeds to help pay for your child’s freshman year, it’s better to borrow the funds, instead.

4. Sell capital assets that have decreased in value. The loss effectively lowers your income under federal financial aid rules.

5. Eschew a salary increase in favor of having your company pay your business expenses. Remember that itemized deductions—including those for unreimbursed employee business expenses—are not subtracted when calculating financial aid eligibility.

6. Defer year-end bonuses. If you’re due a healthy bonus at the end of your child’s base year, arrange to have it paid in January of the following year.

7. Start up that new business venture. Any losses from the new venture can reduce your income under the feds’ calculation.

8. Borrow against your home. Borrowing against your home up to the tax-deduction limit of $100,000 for home equity interest may be better than triggering taxable gains by cashing in appreciated mutual fund shares or other assets.

Online resources: The FAFSA Web site, www.fafsa.ed.gov, guides you through all the steps necessary to file financial aid applications. Plus, www.finaid.org offers financial aid advice and interactive calculators for figuring college costs and loan payments.

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