If there’s one number that drives more financial aid information, it’s the adjusted gross income on your IRS 1040 form. This number is the effective income you make per year, and since the FAFSA is the government’s way of determining financial need, your adjusted gross income greatly affects how much financial aid you are eligible for.

What are the components of adjusted gross income? AGI is computed by adding your total income to offsets.

Wages, salaries, tips, etc.
Interest and dividends earned on investments.
Taxable refunds, credits, or offsets of state and local income taxes
Alimony received
Business income or (loss)
IRA distributions
Pensions and annuities
Rental real estate, royalties, partnerships, S corporations, trusts, etc.
Unemployment compensation
Social security benefits

That’s your total income. Here’s a list of the offsets:

Retirement plans and savings
One-half of self-employment tax
Self-employed health insurance deduction
Penalty on early withdrawal of savings
Alimony paid
Moving expenses
Student loan interest deduction
Tuition and fees deduction
Educator expenses
Certain business expenses of reservists, performing artists, and fee-basis government officials
Health savings account deduction
Domestic production activities deduction

Offsets are where you can reduce your adjusted gross income the most, and therefore impact your financial aid eligibility. Right off the bat, if you can max out your contributions to eligible retirement plans like 401ks, IRAs, and other retirement vehicles, you’ll lower your AGI and improve your eligibility for aid – not to mention help save for the future.

We’ll add more tips for reducing your AGI in future blog posts, but start by saving for retirement!

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