For many students, Pell Grants are a much-needed source of free money from the federal government to help with higher education costs. For the 2018 through 2019 school year, you can receive a Pell Grant as large as $5,920, but your actual award depends on your financial need, the cost of attendance, whether you attend school full-time or part-time and how long you are attending school.
For tax purposes, the Internal Revenue Service treats Pell Grants as scholarships. As long as you meet certain requirements, you don’t have to pay taxes on your Pell Grant. However, if you don’t meet those requirements, all or a portion of your Pell Grant could be treated as taxable income.
TL;DR (Too Long; Didn't Read)
If the amount of your Pell Grant is more than the cost of your tuition, the school will issue a refund to you. Be aware, however, that you may be responsible to pay taxes on the portion of the grant that exceeds your tuition.
Tax Treatment of Pell Grants
The IRS treats Pell Grants as a scholarship for income tax purposes, which means that you might not have to pay any taxes on it as long as you satisfy certain conditions. First, you must be a degree-seeking student. Second, the Pell Grant can’t exceed your qualified education expenses. Qualified education expenses include tuition and required fees to enroll at your school plus any course-related expenses that are required of all students in your course.
For example, qualified expenses would include a textbook that your professor requires all students in the course to purchase or a lab equipment fee that everyone in your science class must pay. However, it wouldn’t include any optional study guides that you purchase or a laptop unless your school requires it. Other expenses, like room and board, travel and even tutoring aren’t counted as qualified education expenses.
Effects of Pell Grant Exceeding Tuition
Depending on your other qualified expenses, the portion of your Pell Grant that exceeds your tuition might still be spent on qualified education expenses, thereby keeping it tax free. If you are required to file an income tax return, you can use the new Form 1040 and its associated schedules to report your scholarship income.
For example, say you receive a Pell Grant for $5,000. If your tuition is $4,800 and you must pay $150 in lab fees and $100 in required textbooks, your qualified education expenses still exceed your Pell Grant. Therefore, none of the Pell Grant counts as taxable income. However, if you receive the same $5,000 Pell Grant and you only have $4,000 in tuition plus $250 of other qualified education expenses, then the last $750 of the Pell Grant counts as taxable income.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."