Pell grants offer need-based financial assistance for college and don't have to be repaid like student loans. Generally, Pell grants won't need to be reported on your tax return because they won't count as taxable income. But, make sure you meet the qualifications for the Pell grant to be tax-free before you send your return off to Uncle Sam.
Taxable or Not
Though your Pell grant might not come with the same qualifications or requirements as a scholarship, they're treated like scholarships for income tax purposes. According to IRS Publication 970, first, you must be enrolled in a degree-seeking program or one that prepares you for a specific trade upon graduation. Second, you must use the Pell grant for qualified expenses. Paying non-qualified expenses with your Pell grant makes it taxable income, according to the IRS.
Qualified expenses for scholarships include your tuition plus any mandatory fees, supplies, books or equipment required for your courses. For example, if your chemistry lab charges a $100 equipment fee, you can pay that with your Pell grant and the Pell grant is still tax-free. However, if your college offers an intramural sports program and it costs $50 to sign up, if you pay that with your Pell grant that $50 just became taxable income.
If you do have to include any portion of your Pell grant as taxable income, where it gets reported depends on what tax form you're using to file your return. On Form 1040-EZ it gets included with your other wages on line 1. On Form 1040A or Form 1040 it gets included on line 7. If you didn't receive a W-2 for your Pell Grant -- which is likely the case -- write "SCH" next to line 1 or line 7 to indicate to the IRS that your income includes scholarships.
Your scholarship income is taxed at the same rate as your other earned income for the year when you file your taxes. You can figure out how much you're going to owe by multiplying your taxable Pell grant amount by your marginal tax rate. For example, say you fall in the 10 percent tax bracket. If you must include $500 of your Pell grant in your taxable income, that will cost you $50 on your taxes.
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