How Pell Grants Affect Taxes

July 16, 2012

None of the following should be taken as legal or tax advice, please contact an attorney or tax professional for more information

Students often make mistakes on tax forms when trying to include or except scholarships and grants. The Pell Grant is one such financial aid grant that you do have to list on your taxes but you do not have to pay taxes on, in most cases. This depends on how you spend the funds and whether you spent them on approved educational expenses. In addition, it also changes your eligibility to claim other educational tax credits. These are some the details that you can expect when filing taxes.

Student Status

You have to be enrolled in an accredited, educational institution to be eligible for tax-free Pell Grants. The school must have a regular faculty and also enrolls a certain number of students each year. You have to be eligible for a degree as well or a student in a vocational program that will grant you full-time employment once graduated. If you drop out of school or lose your status in another way, you will have to pay taxes for what you spent with Pell Grant aid.

The Tax-Free Solution

Pell Grants are meant for school expenses only. However, usually there is a small amount of money left over after you pay off tuition and fees. If you spend this left over money on books, school supplies and boarding, you don't have to pay any taxes. However, if you go out and buy a puppy or television, then it is considered taxable income.

Tax Credits

You won't be eligible for other educational credits if you receive a Pell Grant. The American Opportunity and Lifetime Learning credits give a reduction on your tax bill for some school-related expenses, like tuition costs. However, tax-free funds like the Pell Grants, which pay off your tuition, remove your eligibility for these programs. You can still be eligible for some tax credits, if you don't claim all of your Pell Grant and pay some your tuition yourself. Although this may be a fool's error if you are eligible for a high amount of Pell Grant and receive entirely free tuition anyway.

Other Considerations

If you fail classes, drop out of school, withdraw from school for a semester or drop certain courses in a semester, you do have to pay back money that you received from federal programs, such as the Pell Grant and Federal Supplemental Opportunity Grant. In addition, if you were expelled for criminal activity or you were convicted of a drug felony, you may not be eligible for further financial aid.

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Whether you’re on your way to school for the first time or thinking about finishing up a degree you should explore your options when it comes to obtaining Grants for School.

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