Does Selling Stocks Increase Financial Aid?

Stocks, especially those in the name of the child, can drastically reduce your student's financial aid. Thus, you might need to start planning on sheltering your assets months or years before the child files his Federal Application for Student Aid (FAFSA). Depending on your income and which tax form you use, you might not need to do anything with the stock.

Identification

Selling stock does not automatically increase your student's financial aid package. If you experience capitals gains on the investment, you might decrease your kid's financial aid awards because of your higher income level. However, if you have a bad investment, you can offset gains on other stock and possibly reduce your income. As of 2011, the IRS lets you deduct up to $3,000 in capital losses after offsetting capital gains on other assets, according to the IRS website.

Easy Tax Sheltering

The FAFSA only factors in assets like stock when you file Form 1040, according to Sallie Mae. If you can file a simple return like the 1040EZ or 1040A, you get to exclude stock from your need calculation. As of 2011, the requirement for filing 1040EZ or 1040A is that you have a gross income of $50,000 or less. You may want to work a little less during the year if you are on the fence, such as taking an unpaid sabbatical if the employer allows you to do so.

Prevention

Sell stock the year before the child files his FAFSA so you do not include capital gains in your income if you think your shares could decrease the child's awards more than the stock will appreciate. Also, spend stock held in the child's name first or transfer it to your name. The FAFSA assesses parental assets at a rate of 5.64 percent and student assets at a rate of 20 percent, according to Mark Kantrowitz of FastWeb.

Tips

Another reason to keep stock in your name is that the FAFSA allows parents to exclude some assets from the expected family contribution calculation. The actual exclusion amount depends on your years from retirement, but the typical parent can exclude up to $45,000 in any assets. Also, you can sell assets before the child files FAFSA and convert them in a protected asset. The FAFSA never assesses certain types of assets, such as as retirement accounts and the family's primary home.

References

• FAFSAOnline.com: FAFSA Online Secret: Sell Bad Investments
• Internal Revenue Service: IRS Reminds Taxpayers They Can Use Stock Losses to Reduce Taxes; May 2011
• SallieMae: Family Assets
• FastWeb; Ask Kantro: Questions about Assets and the Free Application for Federal Student Aid (FAFSA); Mark Kantrowitz; November 2009
• FinAid.org: Maximizing Your Aid Eligibility