On the 2026-27 FAFSA, untaxed income is a short, specific list: tax-exempt interest, the untaxed portions of IRA distributions and pensions, the taxable part of any college grants, scholarships, or AmeriCorps benefits reported as income, plus child support you received and any foreign earned income exclusion you claimed. The form pulls most of these figures from your 2024 federal tax return through a direct IRS data transfer, then adds them to your income in the Student Aid Index formula. The list is shorter than it used to be, and knowing exactly what still counts, and what no longer does, is what determines whether your aid calculation reflects your real finances.
What the 2026-27 FAFSA Counts
Under the FAFSA Simplification Act, the untaxed income items on the current form fall into two groups: figures drawn from your 2024 Form 1040, and items you report in separate FAFSA questions.1Federal Student Aid. 2026-27 FAFSA Form
From your tax return:
- Tax-exempt interest income. The total on Form 1040, line 2a. This mainly captures municipal bond interest.
- Untaxed portions of IRA distributions. Line 4a minus line 4b.
- Untaxed portions of pensions. Line 5a minus line 5b.
- IRA and pension rollovers. Reported separately so the rollover portion of those untaxed distributions gets subtracted back out.
- College grants, scholarships, and AmeriCorps benefits reported as income. The taxable portion is subtracted from your total income in the formula.
Reported in their own FAFSA questions:
- Child support received during the last complete calendar year. Under the Student Aid Index formula, this figure feeds the asset side of the calculation rather than income additions.2Federal Student Aid Knowledge Center. Student Aid Index and Pell Grant Eligibility
- Foreign earned income exclusion claimed on Schedule 1, line 8d. This gets added back into your total income.3Federal Student Aid. Foreign Earned Income Exclusion
What the FAFSA No Longer Counts
If you remember an older, longer list, that memory is a trap. The FAFSA Simplification Act removed several categories beginning with the 2024-25 award year, and those changes still hold for 2026-27. Gone from the form: housing, food, and living allowances paid to military members and clergy; veterans’ non-education benefits; and the broad catch-all categories of “other untaxed income” and “money received by or paid on behalf of the student.”4Federal Student Aid Knowledge Center. FAFSA Simplification Act Changes for Implementation in 2024-25
In practical terms, you no longer report elective deferrals to retirement plans (the amounts in Box 12 of your W-2 under codes like D, E, F, G, H, and S), military Basic Allowance for Housing or Basic Allowance for Subsistence, VA disability payments, or clergy housing allowances. These remain untaxed income in the general tax sense, but the aid formula ignores them. For military and clergy families, the change can meaningfully lower the Student Aid Index and improve eligibility for need-based grants.
One more item worth flagging because it commonly gets reported by mistake: Health Savings Account contributions appear nowhere on the FAFSA, in either the income or asset sections. Skip them entirely.
How Untaxed Income Moves Your Student Aid Index
The Student Aid Index replaced the Expected Family Contribution as the number colleges use to determine eligibility for need-based aid. The untaxed income items still on the FAFSA are added to your adjusted gross income in the formula, raising your total income figure.5Federal Student Aid. 2026-27 Student Aid Index and Pell Grant Eligibility Guide A higher total income generally produces a higher SAI, which reduces your eligibility for Pell Grants and other need-based awards.
The formula runs differently for dependent students, independent students without dependents, and independent students with dependents. In all three, untaxed IRA distributions and untaxed pension amounts get added to income, and qualified rollovers get subtracted back out. That subtraction is where most preventable errors happen.
Rollovers: The Most Common Mistake
When you move money from one eligible retirement account to another, such as rolling a 401(k) into an IRA, the transfer shows up on your tax return as a distribution even though you never spent the money. The FAFSA formula would treat that phantom distribution as untaxed income unless you separately report the rollover amount so it can be subtracted.
For the 2026-27 FAFSA, enter the rollover amounts reported as part of your untaxed IRA distributions or untaxed pension amounts for the 2024 tax year.6Federal Student Aid. IRA Rollover Into Another IRA or Qualified Plan Check Form 1040 lines 4a and 4b for IRAs, or 5a and 5b for pensions. If the word “Rollover” appears next to either line, only report the portion of the untaxed distribution that came from the rollover. If the resulting number is negative, enter zero.
The IRS data transfer does not flag rollovers automatically. This is one of the few untaxed-income items you must handle manually regardless of whether consent was granted for the data exchange.7Federal Student Aid Knowledge Center. Verification, Updates, and Corrections Missing the entry can make it look like your family received tens of thousands of dollars in retirement income when the money simply moved between accounts, and a single uncorrected rollover can inflate your SAI by thousands of dollars.
Where the Numbers Come From
Most of the untaxed-income figures fill in automatically through the FUTURE Act Direct Data Exchange, which sends your federal tax information from the IRS directly to the Department of Education. Every contributor on the FAFSA, whether student, spouse, or parent, must consent to this transfer. Consent is not optional: if any required contributor declines, the Student Aid Index will not be calculated and the student becomes ineligible for federal student aid entirely.8Federal Student Aid. What Does It Mean to Provide Consent and Approval to Retrieve Federal Tax Information
When consent is granted, the IRS populates fields including tax-exempt interest, untaxed IRA distributions, and untaxed pension amounts. What the transfer does not do is identify rollovers, so keep your 2024 Form 1040 within reach even if you plan to rely on the data exchange.9Internal Revenue Service. Instructions for Form 1040 (2025) Tax-exempt interest appears on line 2a. Untaxed IRA distributions are line 4a minus line 4b, and untaxed pension amounts are line 5a minus line 5b. If you claimed a foreign earned income exclusion, that figure is on Schedule 1, line 8d, and you enter it on the FAFSA yourself. For child support received, you need the total for the most recent complete calendar year, drawn from state agency records, court orders, or your own logs.
Which Tax Year the FAFSA Uses
The FAFSA uses a prior-prior year approach. For the 2026-27 academic year, every tax-related question refers to your 2024 federal tax return, and this applies to both the student’s and the parent’s financial information.1Federal Student Aid. 2026-27 FAFSA Form The two-year lookback means you work with a completed, filed return rather than an estimate. If your financial situation changed sharply after 2024, ask your school’s financial aid office about a professional judgment review.
Verification and Misreporting
Some FAFSAs get selected for verification, meaning your school will ask you to prove specific items on the form. If IRS data was not transferred through the FA-DDX, you may need an IRS tax transcript or a signed copy of your 2024 return. For untaxed IRA distributions or pensions that contain a rollover, verification requires a signed statement confirming the rollover amount, even when the rest of your tax data transferred automatically.7Federal Student Aid Knowledge Center. Verification, Updates, and Corrections If you did not file a tax return because you were not required to, you provide a signed statement to that effect along with any 2024 W-2s. Aid cannot be disbursed until verification is complete.
Honest mistakes are correctable through your school’s financial aid office or by updating the FAFSA online. Deliberate misrepresentation is a different matter. Federal law provides that anyone who obtains student aid funds through fraud or false statements faces a fine of up to $20,000, up to five years in prison, or both; if the amount involved is $200 or less, the maximum drops to a $5,000 fine and one year of imprisonment.10Office of the Law Revision Counsel. 20 U.S. Code 1097 – Criminal Penalties The confusion that rollovers and untaxed pension math routinely cause is exactly what the correction and verification processes exist to handle.