Wondering if the financial aid you received is taxable? You’re not alone. Thousands of people receive financial aid every year, and many of them don’t realize that the money they receive may be taxable.
Is financial aid taxable? Financial aid can be taxable or non-taxable depending upon the aid you receive. Financial aid used to pay for tuition and required fees, books, supplies, and equipment, is tax-free. However, any money spent on room and board or a living stipend is taxable.
Our blog post will help clear up any confusion about whether or not your financial aid is taxable. We’ll provide you with information on how to report your financial aid on your taxes, and answer some common questions about this topic.
Is Financial Aid Taxable?
Financial aid can be in the form of scholarships, fellowship grants, or other need-based grants (pell grant)
A scholarship is a sum of money given to a student at an educational institution for the purpose of the study. A fellowship grant is usually an amount paid or granted to an individual for the purposes of study or research.
Please note that Under the Coronavirus Aid, Relief, and Economic Security Act (COVID Assistance), the COVID Relief Act (COVID Relief), and the American Rescue Plan Act of 2021, students may qualify for emergency financial aid grants for unexpected expenditures or unmet financial need. They are not taxable.
Tax-Free
If you receive a scholarship, fellowship grant, or other grants, any or all of the money you receive may be tax-free. Scholarships, fellowships, and other grants are tax-free if you fulfill the following requirements:
- You’re a candidate for a degree from an institution that has a regular faculty and curriculum and where most students are usually in attendance at the location where it conducts its academic activities. and
- The money you get is used to cover tuition and fees for enrollment or attendance at a school, as well as fees, books, materials, and equipment needed for courses taken there.
Taxable
You must include in gross income:
- Only the amounts spent on miscellaneous costs, such as room and board, transportation, and optional equipment are deductible.
- Amounts paid as Endowments or Awards for Teaching, Research, or Other Services Received in Return for Obtaining the Scholarship or Fellowship Grant. However, you are not required to include in gross income any payments for services that are necessary by the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, or a comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college.
Calculating Taxes On Financial Aid
Financial aid enables you to pay for your education. If you submit a Free Application for Federal Student Aid, the federal government provides various sorts of financial assistance to students. Each kind of financial award you get has its own set of tax consequences that must be taken into account on your federal tax return.
Following are the steps to calculate taxes on financial aid:
Step 1: Exclude your Pell grant from taxable income
If you receive a Pell grant, the funds will not be included in your federal taxable income unless you use them for unapproved reasons.
The Pell grant’s tax-free status is dependent on whether you’re enrolled in school and solely utilizing the funds to pay for tuition, fees, books, supplies, and equipment. However, if you utilize the money to cover your room and board or even school-related travel expenditures, you must include the portion of the grant allocated to these costs as taxable.
Step 2: Include your earnings from a work-study award on your tax return
Many students are given part-time work as a condition of receiving their FAFSA award. Although this money is supposed to help you pay for college, it is completely taxable on your tax return and considered employment income. When you prepare your tax return, you must include these amounts on the appropriate line for wages and salary.
Step 3: Exclude from taxable income any government student loans
Even if your FAFSA records these loans as a part of your “award,” they are never considered taxable income. However, if your income is not too high and you use the money only for school-related expenses while in college, you may be eligible for a student loan interest deduction when you begin repaying these loans.
Step 4: Evaluate any state financial awards you receive
Many states provide additional financial aid to students who complete the FAFSA. Any award you get from the state is subject to the same federal income tax treatment as other government awards. If you’re fortunate enough to receive a grant from your state that you don’t repay, for example, you treat it the same as a Pell grant, which commands that the money be used in a specific manner. State-sponsored student loan subsidies are also excluded from taxable earnings.
How To File Financial Aid On Your Federal Taxes?
Generally, you report any portion of a scholarship, fellowship grant, or other grants that you must include in gross income as follows:
- Include the taxable portion of your income on Form 1040 or Form 1040-SR, even though you may only owe taxes on a fraction of it. Include “SCH” in the space to the left of the “Wages, salaries, tips” line if no taxable amount was reported by your employer on Form W-2.
- The taxable amount should be shown on the “Scholarship and fellowship grants” line of Form 1040-NR if you’re filing as a married individual without dependents.
State Taxes On Financial Aid
Just as the federal government taxes your financial aid, so may your state. Each state sets its own rules for taxing scholarships and grants received by residents. Check with your state department of taxation to find out how scholarship awards are taxed in your location.
Conclusion
So, what is taxable and what is not when it comes to financial aid? The answer depends on the type of aid you receive. The good news is that most types of financial aid are tax-free, but there are a few exceptions. Be sure to consult with a tax professional if you have any questions about how your financial aid will be taxed. Thanks for reading!