Pell Grant and Taxes – How It Works

Managing your finances on your own is not an easy task, but it does not have to be confusing either. The awarding of a Pell Grant is usually a very smooth process. This is equally true for its disbursing. You simply need to fill in the FAFSA and submit the necessary documents to your school’s financial aid office. Then you can readily take advantage of the funding. Things can get a bit more complex when it comes to completing a tax report. It is a good idea to learn more about this so that you avoid any potential problems in the future.

The IRS treats the Pell Grant as a scholarship for determining tax treatment. Since this type of grant is considered to cover your cost of attendance and other relevant educational expenses only, it is tax-free. This means that you do not have to file a tax return if the Pell Grant is the only income that you receive. Similarly, you should not include it in the tax return form that you or your parents file for income earned from other sources.

Many students are confused by the fact that the Pell Grant is not taxable only if the money is spent on educational expenses. The latter term is very vague, but the IRS has given a definition for it. These expenses include tuition fees and other costs related to attendance, such as money spent on textbooks and other equipment. Still, grant money spent on room and boarding, travel and equipment not used for educational purposes is taxable.

These differences usually do not concern students receiving a Pell Grant since most, if not all of it, goes directly to covering tuition fees and other charges related to the cost of attendance. The school applies for the money directly toward your account so that your debt to them is cleared. If there is a remainder left and you spend it on anything related to school, you do not have to report this income. Generally, this sum is usually very small, so you will not have a problem if you do not include it in your tax report, even if you spend it on childcare, for instance.

However, the situation is different if you receive the Pell Grant or part of it directly from your school in the form of a check. In this case, the income is still considered tax-free provided that you can prove that you have spent it for education costs that qualify. For instance, if you use the money to pay your tuition fees, you do not have to include it in your tax return. However, if you spend it on your room and boarding, the income automatically becomes taxable. That is why you should be careful what you use the grant for.

Overall, you should follow the rules regarding the use of the Pell Grant and you will not have problems when it comes to filing your tax report. If your personal situation is more specific, you should ask a specialist for individual advice.