Do You Pay Tax on Your Child's College Pell Grant?

The cost of a college education is rising at twice the rate of inflation.

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Qualifying for a Pell Grant helps you minimize the amount you have to contribute to help your children attend college. However, not all scholarships and grants are tax-free. Knowing the rules for how you must report grants on your taxes – and the tax returns your children file – allows you to avoid making mistakes on your tax return.

Tip

You won’t have to pay taxes on your child’s Pell Grant because it’s not your income, and depending on how your child uses it, he or she might not have to either.

Pell Grant Generally Excluded

The taxes on the Pell Grant, if any, would be paid by your child. However, your child might not have to pay taxes either. As long as the Pell Grant is used for qualified educational expenses and your child is a degree-seeking student, your child won’t have to include the Pell Grant as part of his or her taxable income. Qualified educational expenses include tuition and fees required to attend school as well as course-specific materials that are required for everyone in the class. For example, a lab fee that everyone in chemistry class must pay would count, but an optional study aid wouldn’t count.

Grants for Living Expenses

The tax-free treatment of Pell Grants only extends to Pell Grants used for qualified education expenses. A Pell Grant is taxable to the extent you use it for any nonqualified expenses, such as room and board. For example, say your tuition costs $20,000 and you have $8,000 in room and board costs. If you have a scholarship from the school for $18,000 and a $3,000 Pell Grant, the first $2,000 of your Pell Grant is tax-free because it is used for qualified expenses. However, the last $1,000 that isn’t used for qualified expenses counts as taxable income.

Lower Tax Brackets in 2018

The Tax Cuts and Jobs Act reduced income tax rates for the 2018 tax year. Though the first tax bracket is still 10 percent, the second tax bracket is only 12 percent instead of 15 percent. When it comes to the IRS, Pell Grant rules extend beyond whether the grant is taxable. If you want to claim the American opportunity credit and a Pell Grant paid for part of your costs, you can’t use any portion of your Pell Grant that you treat as tax-free when calculating your qualified expenses.

2017 Tax Brackets

The rules for determining whether the Pell Grant is taxable are the same in 2017 as they are in 2018. However, the tax rates are higher in 2017 than they are in 2018. For example, in 2017, if you’re single, the first $9,325 of taxable income is taxed at 10 percent, and income between $9,325 and $37,950 is taxed at 15 percent.

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About the Author

Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."


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