Federal Pell Grants are considered tax-free income.
A Pell Grant is a form of gift aid dispensed through the U.S. Department of Education (DOE) to undergraduate students with financial need. Pell Grants do not need to be paid back.
Your family’s expected family contribution (EFC) is taken into consideration by assessing assets and family income. Your EFC is then subtracted from the cost of attendance (COA) at your participating school. The difference can be offered in the form of a Pell Grant to help low-income students afford the costs of college.
The COA at your school can take into account tuition and fees, as well as living expenses. Not all of these things are classified as approved educational expenses in the eyes of the IRS. Funds used for tuition, fees, books, and school supplies are exempt from taxes, while those used for room and board are considered taxable income.
In short, Pell Grants are tax-free, but only if the money is used toward qualified expenses.
Qualified Educational Expenses Are Tax-Free
Fellowship grants, traditional grants, and scholarships are considered tax-free income by the IRS. This includes the Pell Grant.
If you are an undergraduate student seeking your first bachelor’s degree, and you have financial need, you can receive up to $6,195 in Pell Grant funds for the 2019–20 academic school year. This is tax-free income, but specific terms and conditions apply.
Pell Grants are awarded based on the COA at your school minus your family’s EFC. The COA can include a variety of expenses related to attending college. Not all of these expenses are considered approved educational expenses by the IRS, though.
You can use your Pell Grant funds to pay for the following to keep it as tax-free income:
- Tuition
- School fees
- Supplies directly related to obtaining your degree
- Books
As long as you only use your Pell Grant money for these things, the funds remain tax-free.
Pell Grant Taxable Income
Pell Grant funds can also be used to pay for additional college expenses, such as room and board, living expenses, transportation, and other miscellaneous personal expenses. If you use Pell Grant funds to pay for these things, you will need to claim this portion of the money on your tax return.
They are not considered approved educational expenses by the IRS and are therefore not tax-free.
Including Financial Aid on Your Tax Return
When you are filing your taxes each tax year, you will need to pay attention to how you have used your federal financial aid, as well as other forms of financial aid, to pay for your expenses. It is helpful to keep detailed documentation on how and where the funds were allocated for your tax forms and tax preparation. 
The different types of financial aid you are awarded after filing your Free Application for Federal Student Aid (FAFSA) can be taxed differently, even if they’re included in the same award letter.
Pay close attention to the different types of financial aid you receive and how you use it. This goes for state, institutional, and private student aid, as well.
The IRS provides a tool you can use to determine what you will need to claim on your taxes, what is tax-deductible, and what funds need to be filed.
The following guidelines can also help:
- Pell Grant funds used for direct qualified educational expenses are exempt and do not need to be included in your tax forms or filings.
- Any grant or scholarship funds used for non-qualified educational expenses, including room and board and even school-sponsored travel, are taxable and need to be included when you file taxes.
- Federal work-study programs are classified as taxable income since you work to receive compensation. You will need to pay taxes on these funds.
- Exclude student loans from your tax filings. Even though your FAFSA will count federal student loans as part of your financial aid award, these funds are not considered taxable income. In fact, you can even get a tax deduction on the interest payments when you have to start paying your loans back.
As an undergraduate college student, you likely don’t have a large taxable income, and you are likely encouraged by the idea of a large tax refund. There are advocates for claiming all of your Pell Grant as taxable income if it does not raise your income bracket too high. You can then claim the educational credit as a deduction to get the amount refunded.
This can be a tricky process that doesn’t always work, however. If you consider this route, be sure to consult a professional to see if it can work for you.
As a general rule, if you use your Pell Grant funds for your direct school enrollment fees, tuition, books, and supplies, you will not need to claim this money as income on your tax return each year.
If you use any of the funds for anything else, including living expenses or transportation, you will need to include the amount you used toward these things as taxable income during your tax prep and when you file with the IRS.
