Can You Claim an Education Tax Deduction If You Used a Pell Grant to Pay?
If you received a Pell Grant to help cover the cost of education, you may wonder what other education benefits you may qualify for. While you cannot double-dip and receive benefits for the same expenses twice, such as a tax deduction for the tuition the Pell Grant covered, you may qualify for a deduction or credit for eligible education expenses that exceed the grant amount.
Federal Pell Grants are need-based nontaxable scholarships for tax purposes. They should not be reported as income for tax purposes, as long as it was used to pay for qualified education expenses. Because they are nontaxable and not considered income, you cannot claim a tax credit or deduction for any portion of the education expenses that were covered by the grant. However, receiving a Pell Grant does not mean you cannot also get a tax credit or deduction. If your eligible expenses and fees were more than the grant, then you may be able to claim the difference on your taxes.
There are two tax credits you may qualify for. The American Opportunity Credit is a partially refundable tax credit for up to $2,500. Forty percent is refundable. So even if you do not owe taxes, you could still see a refund of $1,000. To qualify, the student must be within the first four years of college and have eligible expenses such as tuition, fees, course-related books, supplies and equipment that were not covered by the Pell Grant. The other credit is the Lifetime Learning Credit, which is nonrefundable but can reduce the amount of tax you owe by up to $2,000. There is no limit to the number of years this credit can be claimed, but eligible expenses are only those charged by the school for attendance that were not paid for with the Pell Grant.
Tuition and Fees Deduction
You cannot take the tuition and fees tax deduction if you take one of the educational credits. But if you do not qualify for one of the credits, this deduction can be used to lower your taxable income by up to $4,000. You do not have to itemize deductions to get this deduction; instead, the deduction adjusts your reported income. You can qualify for this deduction even if you received a Pell Grant, as long as the grant did not pay for all of the eligible expenses; the deduction is limited to the portion of expenses not paid for by the Pell Grant.
Federal student loans are treated differently than the Pell Grant. While they and the interest on them are nontaxable, they do not affect your ability to qualify for tax credits or deductions. Any expenses you pay with a student loan can also qualify for other education tax breaks. However, if you have a 529 account, any expenses you pay with this tax-free account cannot be claimed for a tax credit or deduction; in this way expenses paid with a 529 account are handled the same as with a Pell Grant.
- Internal Revenue Service: Scholarships, Fellowships, Grants and Tuition Deductions
- TurboTax: Paying Qualified Education Expenses with Grants or Scholarships
- Mapping Your Future: Claim Tax Credits and Deductions for Education
- What is a 529 plan?: How Does a 529 Plan Affect Your FAFSA?
- College Data: 529 College Savings Plans
- TurboTax: Can I Take an Education Credit or Deduction for Tuition Paid with Student Loans?
- Internal Revenue Service: Taxable Income for Students
- Internal Reveue Service: Tax Benefits for Education -- Information Center
Sara Mahuron specializes in adult/higher education, parenting, budget travel and personal finance. She earned an M.S. in adult/organizational learning and leadership, as well as an Ed.S. in educational leadership, both from the University of Idaho. Mahuron also holds a B.S. in psychology and a B.A. in international studies-business and economics.