When a regular IRA is converted into a Roth IRA, the amount of the
conversion is reported as taxable income on the income tax
return. Dear Colleague Letter GEN-99-10
indicated that since the family does not actually have additional
available income or assets, it is acceptable to adjust income to
eliminate the amount attributable to the Roth IRA conversion. The Dear
Colleague letter also indicates that one may make a corresponding
adjustment to the taxes paid. However, some financial aid
administrators feel that to the extent that the taxes must be paid
regardless of the financial aid treatment, they represent an actual
non-discretionary expense of the family that should not be reduced.
On the other hand, to the extent that the prior tax year income is a
proxy for award year income, one should make a corresponding
adjustment to taxes paid in order to reflect the impact of the
anticipated taxable income during the award year. Most financial aid
administrators will adjust taxes paid when the adjustment to income
reflects a change in taxable income.
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