College Grant Taxation

• When you fill out your free application for federal student aid, or FAFSA, you may receive a Pell grant award that you can use to help finance your education. Even though this is free money, meaning you don't have to pay it back, the government provides an exception to the general rule of inclusion in taxable income. This also applies to other scholarships you receive, but only if you don't have to provide services or actively participate in a competition to get it. However, the IRS may require you to include this money on your tax return if you don't use the funds a certain way.
  
  

College Expense Requirements

• Keeping your grant money separate from your taxable income at the end of the year is not hard as long as you follow some simple guidelines. In the event your school doesn't receive the funds directly, you must only use the money to make tuition payments. And as long as all other students are subject to the same charges, then you can also use the grant money to pay for college fees, books, supplies and equipment. Since it's not essential for you to live away from home when attending college, the government considers your room and board charges a personal expense for which it will not allow you to use tax-free grant funds to pay for. If you use part of the grant to pay for room and board, then only that portion of the grant is taxable.
  
  

Working Towards Degree

• The federal government doesn't want to subsidize your education with tax-free assistance unless you will have something to show for it when you finish. For this reason, the IRS only allows you to exclude the grant from your tax return if you are working towards a degree at a primary or secondary school, or a college. Alternatively, the grant will remain tax-free if you attend courses that can count as full credit towards a bachelor's degree or higher if not officially pursuing a degree yet. And if you are attending a professional training course that doesn't result in the award of a degree, the funds retain its tax-free status provided the courses prepare you for full-time employment in a recognized profession.
  
  

Losing Other Benefits

• One issue you need to be aware of when filling out your tax return is that you cannot claim an education credit or a deduction for any tuition payment you make with a tax-free grant. However, this is not an all or nothing rule. If your tax-free grant only covers half of your tuition, and you pay the balance with other funds, you can claim a credit or deduction for the costs that you pay for yourself.