When Is Your Pell Grant Considered Taxable Income?

A Pell Grant is a form of federal financial aid for undergraduate students with exceptional financial need that does not need to be repaid. Whether this grant money counts as taxable income depends entirely on how the funds are used. If the money is spent on specific, approved educational costs, it is tax-free. When the funds are used for other purposes, however, they are subject to income tax.

Determining the Taxable Portion of Your Pell Grant

The taxability of your Pell Grant hinges on the Internal Revenue Service (IRS) definition of “qualified education expenses.” Grant money is tax-free only when used to pay for these specific costs. Qualified expenses include tuition and fees required for enrollment or attendance at an eligible educational institution, as well as the cost of books, supplies, and equipment that are mandatory for your courses.

Any portion of your Pell Grant used for expenses outside of this definition is considered taxable income. These non-qualified expenses are personal costs that trigger a tax liability and include:

• Room and board, even if the housing is on-campus
• Travel costs and transportation
• Optional equipment
• General living expenses

To calculate the taxable amount, you must subtract the total you spent on qualified education expenses from the total Pell Grant funds you received. For instance, imagine you received a $6,000 Pell Grant. If you spent $5,000 on tuition and $500 on required textbooks, your total qualified expenses would be $5,500. The remaining $500 of the grant would be considered taxable income that must be reported to the IRS.

Required Information and Tax Forms

To accurately determine your taxable grant income, you will need Form 1098-T, Tuition Statement. Your college or university is required to send this form to you by January 31 of the following tax year. This document reports amounts related to your tuition payments, scholarships, and grants.

Form 1098-T contains two particularly important boxes for this purpose. Box 1 shows the total payments the institution received from you for qualified tuition and related expenses. Box 5 details the total amount of all scholarships or grants administered by the educational institution.

It is important to maintain your own detailed records, as Form 1098-T does not capture all potential qualified expenses. For example, if you purchase required textbooks or course equipment from an off-campus vendor, it will not appear on your Form 1098-T. Keeping receipts for these purchases is the only way to accurately calculate your total qualified expenses and the taxable portion of your Pell Grant.

Reporting Taxable Grant Income on Your Tax Return

Once you have calculated the taxable portion of your Pell Grant, you must report this amount as income on your federal tax return. You will report the taxable amount on Schedule 1 of Form 1040, which is used for “Additional Income and Adjustments to Income.”

The taxable grant money is entered on the line designated for “Scholarship and fellowship grants not reported on Form W-2.” You will write the taxable amount on this line and write “SCH” in the space to the left of the line itself. This income is then added to your other sources of income to determine your adjusted gross income for the year.

Interaction with Education Tax Credits

A strategic consideration arises when your Pell Grant interacts with education tax credits, such as the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC). The IRS has a rule that prevents “double-dipping,” meaning you cannot use the same qualified education expenses to both justify the tax-free status of your grant and to claim an education tax credit. This creates a choice for the taxpayer.

You may find it financially advantageous to intentionally include a portion of your Pell Grant as taxable income, even if it was spent on qualified expenses. By reporting some of the grant as income, you “free up” the corresponding tuition and fee payments. These freed-up expenses can then be used to claim a tax credit like the AOTC, which can be worth up to $2,500 per eligible student.

For example, suppose you have $4,000 in tuition expenses covered entirely by a tax-free Pell Grant. In this scenario, you cannot claim the AOTC because you have no out-of-pocket expenses. However, you could choose to report the $4,000 grant as taxable income. This would allow you to claim the AOTC on the $4,000 of tuition expenses, potentially resulting in a tax credit that is significantly larger than the tax owed on the grant money.