The Internal Revenue Service wants college students to be a little smarter when it comes to their scholarships and any emergency grants they may have gotten due to the pandemic.
The agency is spreading its knowledge by updating frequently asked questions (FAQs) in its webpage on Higher Education Emergency Grants.
Fact Sheet 2022-11 now has two new questions and answers to enlighten taxpayers on their tax responsibilities in relation to higher education.
What do students need to know?
The updated fact sheet says any emergency grants related to the COVID-19 pandemic received by the student taxpayer from the organization providing their scholarship are not taxable and aren’t included in the student’s income.
This covers grants made by a federal agency, a state, an Indian tribe, a higher education institution or some other scholarship-granting organization.
When reporting their qualified tuition and related expenses, taxpayers shouldn’t decrease tuition and expenses by the amount of an emergency financial aid grant.
Students who used an emergency grant to pay for qualified tuition and expenses on or before Dec. 31, 2020, may be able to claim a tuition and fees deduction, the American Opportunity Credit, or the Lifetime Learning Credit on a 2020 tax return. For more information, see Higher Education Emergency Grants Frequently Asked Questions.
After Dec. 31, 2020, the tuition and fees deduction isn’t available. Publication 970, Tax Benefits for Education, has details.
What do institutions need to know?
Since students don’t count emergency financial aid grants as income, higher education institutions don’t have to issue Forms 1099-MISC to report those grants.
Emergency grants made under the Coronavirus Aid, Relief and Economic Security Act—also known as the CARES Act—or the COVID-Related Tax Relief Act are covered by this provision, so they won’t show up in Box 5 of Form 1098-T.
However, any amounts that do qualify for “qualified tuition and related expenses” under the American Opportunity Credit, the Lifetime Learning Credit or the tuition and fees deduction put the reporting requirements of Internal Revenue Code section 6050S into play. If so, those extra amounts, including tuition and expenses paid by emergency financial aid grants to students, will show in Box 1 of Form 1098-T.