Does Military Retirement Count as Income for FAFSA?
When it comes to determining financial aid eligibility, the Free Application for Federal Student Aid (FAFSA) considers a family’s income from various sources, including military retirement pay. The question is: Does military retirement count as income for FAFSA?
Short Answer
Military retirement pay may not be considered as taxable income by the Internal Revenue Service (IRS), but it is still required to be reported on the FAFSA.
Understanding FAFSA’s Income Requirements
FAFSA’s income calculation includes the following components:
- Adjusted Available Income (AAI): This is the parent’s (or student’s) income, reduced by federal income tax and adjustments to income (e.g., alimony paid or deducted).
- Taxable Income: This is the total income of the household, including but not limited to wages, salaries, tips, unemployment compensation, Social Security benefits, and veterans’ disability payments.
- Unearned Income: This includes income that is not taxable, such as unearned income from assets like bonds, stocks, and annuities.
What is Military Retirement Pay?
Military retirement pay, also known as Retirement Benefits, is a source of income provided to former members of the military under the Uniformed Services Former Spouses’ Protection Act (USFSPA) or the Survivor Benefit Plan (SBP). Retirement benefits are not subject to income tax, with certain exceptions.
Exceptions to Tax-Exempt Status
Some examples of military retirement pay that are subject to income tax include:
• Divorced Spouses’ Survivor Benefits: Alimony received from a divorced spouse who is a military retiree may be taxable income.
• ReEmployment Pay: Certain retirees receiving reemployment pay as part of the Military Career Transition Program may have it subject to income tax.
Reporting Military Retirement Pay on FAFSA
FAFSA requires applicants to report all sources of income, including military retirement pay. Although the IRS does not require it to be reported, it is crucial to list this income on the FAFSA. Failure to disclose this income could lead to a delay in FAFSA processing or a correction to the expected Family Contribution (EFC), resulting in changes to eligibility.
Reporting Instructions on the FAFSA Form
To report military retirement pay on the FAFSA form:
• Follow Line 51 on the FAFSA where it asks for income information.
• Select "Veterans’ Disability" under the "Type of Income" category.
• Report the amount you receive in retirement benefits per year.
• Sign and date the FAFSA form to verify that you have reported all requested income information accurately.
Examples of How Military Retirement Pay Affects FAFSA
Here are two scenarios to illustrate how reporting military retirement pay affects the FAFSA calculation:
Scenario 1: The student’s parent has an adjusted available income (AAI) of $70,000 per year. They receive a yearly retirement benefit of $4,000, which will not be considered income on the FAFSA, as it is excludable from income by the IRS.
| Type of Income | Amount (Annual) | Type | Does it affect FAFSA? |
|---|---|---|---|
| Parent Income (AAI) | $70,000 | Wages | X |
| Retirement Benefit (exclude from income) | $4,000 | Pension | ** |
Scenario 2: A family receives a yearly income from the student’s military-working parent of $55,000, with no federal income tax deducted (FTD). Additionally, they receive a retirement benefit of $6,000. In this case, the $6,000 retirement benefit is included in the total taxable income**, affecting the adjusted available income (AAI) calculation.
| Type of Income | Amount (Annual) | Type | Does it affect FAFSA? |
|---|---|---|---|
| Parent Income | $55,000 | Wages | X |
| Retirement Benefit | $6,000 | Pension | X ( included in taxable income) |
| FAFSA: AAI (=$61,000) = Wages – FTD = $55,000 + $6,000 (retirement benefit included in taxable income) |
Conclusion
Military retirement pay, while exempt from federal income tax, must be reported on the FAFSA. Accurately reporting this income on the FAFSA helps to ensure that students’ and families’ eligibility for federal student aid is assessed accurately. It is crucial for applicants to disclose all sources of income, including military retirement pay, to avoid any errors in the FAFSA processing.
Remember to follow the FAFSA reporting instructions carefully, sign and date the form to verify the accuracy of reported income, and check for any changes in military retirement pay laws and IRS tax regulations.
