Do I Have to Claim Grants on My Taxes?

Grants provide financial support for various purposes, from education to business ventures, without requiring repayment. Many wonder if these funds are taxable income. Grant taxability depends on the grant’s purpose and how funds are used. Understanding these rules is important for accurate reporting.

Determining Grant Taxability

Grants are taxable income unless a specific legal exclusion applies. A common exception involves qualified scholarships and fellowships awarded to degree candidates at eligible educational institutions. These funds are tax-free if used for tuition, required fees, books, supplies, and equipment necessary for courses. For example, a grant used solely to cover fall semester tuition and textbooks for a university student would not be taxable.

However, if any portion of a grant is used for non-qualified expenses, that amount becomes taxable. Non-qualified expenses include incidental costs such as room and board, travel, and optional equipment. For instance, if a student receives a grant that covers tuition, but also provides funds for their dormitory fees and meal plan, the portion allocated to room and board would be considered taxable income. Payments received for services, like teaching or research required as a condition of the grant, are also taxable, even if the recipient is a degree candidate.

Grants not related to qualified education expenses or those received by individuals who are not degree candidates are taxable. This includes grants for living expenses, even if they support educational pursuits, or grants from non-degree programs. Small business grants or government assistance programs, unless specifically exempted by federal or state law, are taxable. For example, a grant awarded to a small business for operational costs would be fully taxable.

Information Needed for Reporting

Before reporting any grant income, gather specific documentation and understand the grant’s purpose. The award letter or grant agreement from the provider details the grant amount, its intended use, and any conditions or restrictions. This document can help determine if the grant, or a portion of it, is taxable.

For educational grants, students may receive Form 1098-T, Tuition Statement, from their educational institution. Box 5 on Form 1098-T reports the total scholarships or grants processed by the institution. However, this form does not differentiate between taxable and non-taxable portions of the grant, nor does it necessarily reflect grants received directly by the student that were not processed by the school.

For grants received for services rendered or for non-educational purposes, recipients might receive Form 1099-MISC, Miscellaneous Information, or Form 1099-NEC, Nonemployee Compensation. Form 1099-MISC is used for various income types, including certain grants of $600 or more not for services. Form 1099-NEC is issued for nonemployee compensation, such as payments for independent contractor work. Even if a tax form is not issued, any taxable grant income must be reported, making meticulous record-keeping of all grant-related income and expenses essential.

Reporting Taxable Grant Income

Once the taxable portion of a grant is determined and all necessary documentation is compiled, the income must be reported on the appropriate federal tax forms. For taxable scholarship or fellowship income that exceeds qualified education expenses or is for non-degree programs, this amount is reported on Form 1040, Schedule 1, Line 8z, “Other income”. If the amount was not reported on a Form W-2, “SCH” should be entered next to the amount on the wage line of Form 1040.

Grants received for services performed, such as research or teaching, may be considered self-employment income. This income is reported on Schedule C, Profit or Loss From Business. Business grants, including those for operational costs or specific projects, are also reported on Schedule C.

Consider potential state income tax implications, as state tax laws vary regarding grant taxability. While the general principles often align with federal guidelines, some states may have specific rules or exemptions. Accurate reporting of all taxable grant income ensures compliance with tax regulations.