The IRS treats a Pell grant as a scholarship, which means it's possible that you'll have to report the grant money on your tax return and maybe even pay income tax on the money.
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Receiving a Pell grant as part of your federal student aid award can minimize, or even eliminate, the financial burden of paying the tuition to enroll in school. In some cases, the Internal Revenue Service can require that you claim the Pell grant money as income on your tax return. However, if you follow a few simple rules, you can receive your Pell grant money entirely tax free.
Tax-free Pell Grants
A Pell grant does not need to be reported on your tax return, if you satisfy two IRS requirements that apply to all scholarships and grants:
- You must be enrolled in a program as a degree candidate, or you must be pursuing a training program that prepares you for specific types of employment upon completion.
- You must use the Pell grant only to pay for “qualified education expenses.”
Qualified education expenses
Any portion of your Pell grant that is not spent on qualified education expenses is required to be reported on your tax return. Qualified education expenses include tuition and fee payments, and the books, supplies, and equipment required for your courses.
For example, if you take a biology class and the professor requires all students to purchase a specific textbook, the cost of the book is a qualified expense. If the professor only recommends the book, it is not a qualified education expense.
If you use your Pell grant to pay for room and board charges, or to travel to your permanent home on weekends or holidays, then the amount will be considered taxable income.
How to report nonqualified Pell grant expenses on your tax return
If you don't use all of your Pell grant money for qualified education expenses, you need to determine how much of the grant to report on your tax return. Schools commonly combine all student charges in one account. For example, suppose your expenses for the semester are $4,000 for tuition, $2,000 for room and board, and $500 for required textbooks. If you receive a $3,000 Pell grant and use it on tuition and/or books, you won’t have to report any of it on your tax return. If you receive a $5,000 grant, $500 of it will be taxable since you only incurred $4,500 of qualified expenses ($4,000 for tuition and $500 for required books).
Regardless of the tax form you use, you need to report the $500 in the above example on the “wages and salary” line and enter “SCH” to the left of the amount. Just because you report the Pell grant as taxable income, doesn’t necessarily mean you will pay tax on it. This depends on other factors such as the amount of other income you report, your filing status, and the deductions and credits you’re eligible for.