The contribution from parent income is broken into three different pieces:

1. Determining the parents' total income,


2. Figuring out allowances against the income, and


3. Subtracting the allowances from the total income to determine the available income.

I'll tackle these one step at a time.

For the starting income figure, we take the parents' adjusted gross income figure as reported on the bottom on the first page of the tax return (for simplicity, I will assume that we are talking about a family with two parents; at the end of this process I will do another post explaining the differences for divorced / separated families).

To that we add non-taxable income (which can include a wide variety of income sources -- some are child support received, tax-deferred contributions to retirement programs, tax-exempt interest, etc). [For a more complete list, you may want to look at Worksheets A and B from the FAFSA application for the appropriate sources].

Next we remove from parent income any items listed on Worksheet C of the FAFSA (child support paid, education tax credits, etc).

We add the AGI plus the non-taxable income and subtract the income exclusions to come up with the total income.

Now on to allowances against income. There are five main areas:

1. US Income Tax Paid -- we use the actual income tax paid by your parents as reported on the FAFSA and Profile, and as documented by the copy of your tax return,
2. State Taxes Paid -- for this calculation, we use a table (two different ones in fact, one for FM and one for CA) to determine how much of your Total Income should be protected to cover state and local taxes,
3. FICA or Social Security Taxes -- again, for this line we allow a deduction based on a formula against wages earned from any employment to cover taxes paid to the Social Security system,
4. Employment allowance -- for families where both parents are working (or, in a single parent household, where the parent is working) a deduction to allow for the cost of having no one at home (based on a formula and capped at a very low value), and
5. Income Protection Allowance (IPA) -- this is meant to be an offset to protect families with particularly low income to protect the entirety of their income before any contribution is expected (even in part) from them.

There are also three additional allowances that are used only under the CA methodology:

1. Medical / Dental Expense Allowance -- any amount spent on medical and dental expenses greater than 3.5% of total income is allowed as a deduction under the CA methodology.
2. Annual Educational Savings Allowance -- an allowance for savings for other children in the family who are pre-college age (1.52% of total income per pre-college age child). By allowing for this amount, the formula is encouraging families to save some money for college out of current income for younger siblings, and
3. Private Elementary and Secondary School Tuition allowance -- an allowance to reflect ongoing costs for private school tuition for younger siblings; no allowance is allowed for the current student applying to college, but a maximum of $7900 per child.

Some other considerations as regards the CA treatment of income:

• For negative income, we do examine whether the loss was truly a cash loss or a paper loss. If the loss is not a true loss (in other words, a loss on the tax return, but not a cash outlay for the family), the loss is added back to the income.
• Depreciation (whether on a business return or a rental return) is also considered to be a paper loss and therefore is added back to income.
• For families living in a metro area with a high cost of living, we use an optional regionally based cost of living allowance in the CA formula to allow for an increased IPA.

As a reminder then, the difference between total income and total allowances is set aside as Available Income (we will come back to this number later).

So, lots of information, and I'm sure this will generate many questions, so ask away!