Understanding Common Financial Aid Tax Documents for Schools

When managing the financial aid process, it is important to be thoughtful about which documents to request from families rather than asking out of habit. Don’t require documents simply because it is what you have always done!

Streamlining Your Requests with Clarity

While additional documentation can provide deeper insights into a family’s financial situation, it also increases their burden. With Clarity, 1040s and W2s come directly from the IRS, giving many schools confidence to base award decisions on those forms alone. Our schools only request additional information in specific circumstances, such as from business owners.

Therefore, we recommend requesting only the items you will thoroughly review and utilize when determining grant awards.

Below is a guide to some of the most commonly requested documents for financial aid analysis, along with important considerations for each.

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1. Form 1040

Form 1040 is the standard individual income tax return form in the U.S., providing comprehensive information about a family’s annual income. It is available after April 15, or later if the family files for an extension.

Consideration:

• Timing: Align the document request timeline with your award timeline. For example, if you issue awards in February, requesting the current year's 1040 may not be feasible. Many schools opt to use the previous year’s 1040 (for example, 2023’s 1040 for the enrollment year 2025-2026) and only request the current year’s when there are significant changes in the family’s situation. 

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2. W-2

The W-2 form reports an employee's annual wages and the taxes, retirement, and healthcare contributions withheld from their paycheck. It is typically available by January 31st.

Considerations:

• Timing: Ensure the timing works with your deadlines. If you need information by mid-January, don't request a document that's not legally required to be available until the end of January.
• Flexibility: The 1040 will cover much of the information here, so you could consider only requesting W2s when families need to submit additional data (Examples could include new enrollments, or families that ask for special considerations). If you're using Clarity to manage your applications, the prior year's W2s will be received from the IRS by default, so you will have that information verified in your applicant files. If you'd like to request current-year W2s (for example, the 2024 W2s for enrollment year 2025-2026), you can set up Clarity to automatically request those from all who received them. We'll even send them weekly reminders!

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3. Recent Pay Stub

Paystubs provide detailed information about an employee's earnings and deductions for a specific pay period. They can be requested at any time of the year, though some schools elect to ask for an end-of-year pay stub to get a snapshot of a parent’s most recent W2 before the W2 is available. 

Consideration:

• Flexibility: Paystubs can be requested any time of the year, making them a flexible option for providing a fuller picture of the family’s financial situation.

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4. T-4 Slip and Canadian Tax Return

The T-4 slip is the Canadian equivalent of the W-2, reporting income and deductions for Canadian employees. The Canadian tax return and notice of assessment provides a comprehensive overview of a family's annual income, similar to the 1040 for the US. These documents will be available by the end of April.

Consideration:

• Timing: If you plan on making award decisions in February, you won’t have the current year's tax documents from Canadian families. Thus, many schools opt to use the previous year’s documents.

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5. Non-U.S. Tax Filer Income Information

This category includes various forms of income verification for non-U.S. tax filers. It is important to request that families provide documents that have been translated into English!

Consideration:

• Awareness: Income information for non-US tax filers may come in the form of a letter stating salary and benefits from an employer, bank statement(s) to verify ability to pay, or other income verification such as a paystub. Be sure to request that the documents are translated into English.

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6. Form 1065 (Partnership)

Form 1065 reports a business partnership's income, deductions, and credits. It must be accompanied by all schedules and statements, including the K-1 forms for all family members associated with the business showing individual partner distributions, if any.

Consideration:

• Comprehensiveness: Ensure you request all schedules and statements, not just the main form. The personal K-1 form is also necessary to understand the individual’s company distributions. 

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7. Form 1120S (S-Corp)

Form 1120S is used by S-corporations to report income, losses, and dividends to shareholders. 

Consideration:

• Comprehensiveness: Make sure you collect all schedules and statements, including the K-1 forms for all family members associated with the business showing individual shareholder distributions, if any.

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Other Practices for Document Requests

1. Timing: Ensure the deadlines for submitting tax documents align with your financial aid award timelines. Request documents that will be available in time for review.
2. Consistency: If you require a document, be prepared to follow up and review it. Inconsistent enforcement can undermine the credibility of your process. 
3. Flexibility: If you're using Clarity to process financial aid applications, you can set rules (or conditions) around which documents to request from which families and request documents on a case-by-case basis.

By understanding these documents and planning your requests accordingly, you can streamline the financial aid process for your administration and the families you serve. 

Clarity can help automate requests for many of these documents, targeting only relevant families (for instance, only asking for the 1065 form for partnership owners and nobody else) and sending weekly reminders to ensure you don’t have to chase families down for documents! 

If you’d like to learn more about how Clarity streamlines your school's document requesting and review process, reach out below.

Learn more here!

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