The Base Years Change Everything!

As a tax accountant and financial planner for over 25 years, on many occasions, I have found that my usual tax and financial planning recommendations are significantly affected when I learn that my clients are approaching the base years for their college-bound children. (The base year is the calendar year immediately preceding the year in which their child will begin college.)

Here are a few examples of the typical tax and financial questions I ask clients who do not have college-bound children:

• If you are anticipating the receipt of a bonus this year, can it be deferred until next year?
• If you are anticipating the sale of securities or other assets which will result in a significant capital gain, can we delay the sale until the following year?
• If you need to make a significant withdrawal from our IRA, can we delay a portion of the withdrawal until the next tax year?
• If you own a business, can we take out some excess cash in the business so it is not subject to creditor and litigant claims?

Although these recommendations are appropriate for most clients, they can be totally wrong for parents who have a base year coming up in a couple of years. When we consider that the base year is used to determine the amount of financial aid that a family receives, we want the family income and assessable financial assets to be as low as possible in that year and in each year prior to the year when our child will graduate. Proper tax planning is essential to maximize your financial aid. 

As you can see, planning for the base year can change conventional tax & financial planning. I would like to emphasize that each client situation is different and that the recommendations discussed above are not appropriate for everyone. It is especially important when you are approaching your base year to seek out tax and financial professionals who are familiar with financial aid considerations and can incorporate the base year into their financial planning advice. As Ray Martin of Moneywatch reports, not doing so can also cost you thousands of dollars in financial aid, tax deductions, and tax credits for which you may be eligible.