Students and their higher-education institutions are getting a clearer picture of how to report pandemic-related emergency financial aid grants. Or not.
The big news is that the IRS considers aid to students due to the COVID-19 pandemic to be non-taxable.
The Internal Revenue Service used a list of frequently asked questions to pass along the clarification which is aimed both at students and higher-education institutions.
What are the implications for students?
For students, the math is simple. Emergency financial aid grants made by a federal agency, state, Indian tribe, higher education institution or scholarship-granting organization (including a tribal organization) to a student because of an event related to the COVID-19 pandemic are not included in the student’s gross income.
In addition, the IRS says students shouldn’t reduce the amount of qualified tuition and related expenses by the amount of an emergency financial aid grant.
Students who used any portion of the grants to pay for qualified tuition and related 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 their 2020 tax return.
Higher Education Emergency Grants Frequently Asked Questions has more information online.
The tuition and fees deduction isn’t available for tax years beginning after Dec. 31, 2020. Publication 970, Tax Benefits for Education, has more information on the deduction.
What does this mean for higher education institutions?
When students don’t include emergency financial aid grants in their gross income, the math gets simpler for colleges and universities as well.
In this case, the institutions won’t have to file or furnish Forms 1099-MISC that would otherwise be used to report grants made through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) or the COVID-related Tax Relief Act (COVID Relief Act). They also don’t need to report the grants in Box 5 of Form 1098-T.
That said, the IRS reminds that any amounts that qualify for the tuition and fees deduction or either one of the education credits are considered qualified tuition and related expenses.
That means they’ll trigger the reporting requirements of Internal Revenue Code section 6050S. Therefore, higher education institutions are required to include qualified tuition and related expenses paid through emergency financial aid grants awarded to students in Box 1 of Form 1098-T.