Loans are not taxable, so you don't report the loan on your tax return. You may claim an education tax credit if you use loan proceeds to pay school-related expenses (like tuition and fees) but not living expenses (like room and board).
Tax Credits for Higher Education Expenses
The American Opportunity Credit allows you to claim up to $2,500 per student per year for the first four years of school as the student works toward a degree or similar credential.
If you're one of these students, you may be wondering if your financial aid counts as taxable income. Fortunately, the answer is no in most cases. However, there are certain instances when financial aid can be taxed.
There's a new system that allows the FAFSA to pull information directly from your income tax return. You don't have to go hunting for your past returns anymore. You just need to give your consent for the transfer of data.
With consent and approval, we can obtain your federal tax information automatically from the IRS to help complete the FAFSA form. If consent and approval are not provided by the student and all contributors on the FAFSA form, the student will not be eligible for federal student aid, including grants and loans.
Using an earlier tax year for determining aid eligibility makes it significantly simpler for families to complete their FAFSA, because they will are using information from tax records that had been completed and processed by the IRS many months earlier.
Pell Grant is exactly what is says: a grant. You do not owe taxes on grants. Whether you should file a return or not is a more complex answer. If the Pell Grant is your only income, you probably do not need to file a income tax return.
You also can't pay for the purchase of a car with financial aid funds. In particular, a qualified education loan is used solely to pay for qualified higher education expenses, which are limited to the cost of attendance as determined by the college or university.
Reporting the amount of student loan interest you paid in 2023 on your federal tax return may count as a deduction. A deduction reduces the amount of your income that is subject to tax, which may benefit you by reducing the amount of tax you may have to pay.
Cons of Claiming a College Student as a Dependent
If your child has earned income and you claim them as a dependent, they lose the opportunity to claim their own personal exemption (when applicable in future years) and certain tax credits that could be more advantageous for them.
You can increase the amount of your tax refund by decreasing your taxable income and taking advantage of tax credits. Working with a financial advisor and tax professional can help you make the most of deductions and credits you're eligible for.
To claim the American opportunity credit complete Form 8863 and submit it with your Form 1040 or 1040-SR. Enter the nonrefundable part of the credit on Schedule 3 (Form 1040 or 1040-SR), line 3. Enter the refundable part of the credit on Form 1040 or 1040-SR, line 29.
So in the case of Pell grants, scholarships and fellowship grants, if your award covered tuition, housing and meals, the amount you use for tuition is tax-free. However, the amount you used for housing and meals is taxable.
The Satisfactory Academic Progress regulations require that you maintain a minimum cumulative grade point average (GPA) in order to remain eligible for financial aid. This cumulative grade point average is 2.0 on a 4.0 scale. If you drop below a cumulative GPA of 2.0, you will be placed on a financial aid Warning.
Generally, you report any portion of a scholarship, a fellowship grant, or other grant that you must include in gross income as follows: If filing Form 1040 or Form 1040-SR, include the taxable portion in the total amount reported on Line 1a of your tax return.
Typically, the school first applies your grant or loan money toward your tuition, fees, and (if you live on campus) room and board. Any money left over is paid to you directly for other education expenses.
Tuition, fees, supplies and textbooks are among the expenses approved by the federal government, while things like vacations, clothing and some other personal expenses are prohibited.
Reporting financial aid — Don't report nontaxable scholarship amounts on your return. Include taxable amounts with wages — even if the scholarship amounts aren't shown on a W-2. To report the aid: On Form 1040EZ — Include the taxable amount on Line 1.
A Pell grant does not need to be reported on your tax return, if you satisfy two IRS requirements that apply to all scholarships and grants: You must be enrolled in a program as a degree candidate, or you must be pursuing a training program that prepares you for specific types of employment upon completion.
However, students often wonder whether financial aid counts as income. According to the IRS, scholarships and grants do not typically count as taxable income. Neither do student loans.
The verification process involves submitting documents such as tax transcripts and W-2 forms so the financial aid office at your college can see that the information on these documents matches your FAFSA application.
Grants don't need to be repaid, assuming the requirements are met (maintaining a certain GPA, completing the program, etc.). There are fewer grant options compared to scholarships because grants are mostly based on financial-need.
However, students with a zero EFC may qualify for the maximum federal Pell Grant, which is $7,395 for the 2023–2024 award year (July 1, 2023, to June 30, 2024). To qualify for a zero EFC on the 2023-2024 FAFSA, a family with dependent students can't make more than $29,000 annually.