Are Grants to Individuals Considered Taxable Income?

Receiving a grant can be a financial help, but it brings the question: is this money taxable? A grant is a sum of money given by an organization for a particular purpose that, unlike a loan, does not need to be repaid. This financial award can cover a wide range of needs, from educational pursuits to business startups or personal hardship, and the tax rules depend on the grant’s purpose and the recipient’s circumstances.

The Default Tax Treatment of Grants

The Internal Revenue Service (IRS) defines gross income as all income from whatever source derived, unless specifically excluded by law. This broad definition means that, by default, most grants awarded to individuals are considered taxable income. The government views this money as an increase in your wealth, similar to wages or investment returns.

The specific tax treatment can depend on the nature of the grant. If a grant requires you to perform any services, either in the past, present, or future, it is almost always taxable as compensation. This income is also subject to employment taxes like Social Security and Medicare, which might be withheld by the paying entity. Most grants from organizations do not meet the legal definition of a gift.

A grant is assumed to be includable in your income unless you can identify a specific provision in the tax code that allows you to exclude it. The responsibility falls on you, the recipient, to determine if your grant qualifies for one of these exceptions. Without a qualifying exclusion, the full amount of the grant must be reported as income on your tax return.

Common Exclusions from Taxable Grant Income

While the general rule treats grants as taxable, several exceptions exist that shield many recipients from a tax bill. These exclusions are specific and have detailed requirements that must be met. The most common of these relate to education, disaster relief, and certain other niche situations.

Scholarships and Fellowships

The most widely used exclusion applies to scholarships and fellowship grants. You can exclude the portion of a grant used for qualified education expenses from your income. To qualify for this tax-free treatment, you must be a candidate for a degree at an eligible educational institution.

Qualified education expenses are narrowly defined as money spent on tuition and fees required for enrollment, as well as fees, books, supplies, and equipment required for your courses. Expenses that do not qualify include:

• Room and board
• Travel
• Research
• Optional equipment

If a grant covers both types of expenses, you must calculate the taxable portion. For instance, if you receive a $20,000 grant, and $14,000 is used for tuition and required books, while the remaining $6,000 pays for your dorm room, only the $6,000 is included in your taxable income.

Qualified Disaster Relief Payments

Grants provided to individuals to help them recover from a qualified disaster are not taxable. These are payments you receive to reimburse or pay for necessary personal, family, living, or funeral expenses that you incurred as a result of a federally declared disaster. This also includes funds for repairing or rebuilding your personal residence or its contents.

The funds can come from a government agency, like FEMA, or even from your employer or a private foundation. This exclusion does not apply to income replacement payments, such as lost wages or unemployment compensation, nor does it apply to expenses that were already reimbursed by insurance.

Certain Other Grants

A few other, less common, exclusions exist for specific types of grants. Certain achievement awards, such as the Nobel Prize, can be excluded from income if the recipient assigns the prize to a governmental unit or a qualified charity before receiving it. Grants from private foundations to individuals for disaster relief or other charitable purposes may be non-taxable if they meet pre-approved IRS procedures. These situations are rare for the average taxpayer but demonstrate that narrow exceptions are available under specific circumstances.

How to Report Grants on Your Tax Return

Once you have determined the taxable portion of your grant, you must report it correctly on your federal income tax return. The process depends on whether you received any tax forms from the grant provider and the nature of the grant itself.

You may or may not receive a tax form for the grant money. If the grant is considered payment for services, you might receive a Form W-2. Other types of grants may be reported on Form 1099-G from a government entity, while other taxable grants could be reported on Form 1099-MISC. For educational grants, you will likely receive a Form 1098-T from your school, which shows amounts paid for qualified tuition and can help you determine the taxable portion of your scholarship.

If you have taxable scholarship or fellowship income that was not reported on a Form W-2, you should report it on Schedule 1 (Form 1040). This income is entered on the line for “Scholarship and fellowship grants not reported on Form W-2.” The total from Schedule 1 is then carried over to the main Form 1040.

Even if you do not receive a Form 1099 or any other tax document for your grant, you are still legally obligated to report any taxable portion. The responsibility for tracking and reporting income rests with you. Failing to report taxable income can lead to an underpayment of tax, which may result in penalties and interest charges.