How to report FAFSA money on your taxes
If you’re like most students, chances are you need some financial help to finance your college education. The federal government provides various types of financial assistance to students if they file a Free Application for Federal Student Aid (FAFSA). Each type of financial award you receive has separate and unique tax consequences that are treated differently on your federal tax return.
Step 1: Exclude your Pell grant from taxable income
If you are awarded a Pell grant, you won’t include the grant amount in your federal taxable income unless you use the funds for unapproved purposes.
Generally, for the Pell grant to retain its tax-free status, you must be a degree candidate at the college and only use the funds to pay for tuition, fees, books, supplies and equipment. However, if you use the funds to pay your room and board or even school-related travel expenses, then you must include the portion of the grant you use to pay these expenses in taxable income.
Step 2: Include your earnings from a work-study award on your tax return
Many students are provided part-time jobs working at their college as part of their FAFSA award. Although this money you earn is intended to ease the financial burden of attending college, the income is fully taxable on your tax return just like any other employment earnings.
When you prepare your tax return, you must include these amounts on the appropriate line for wages and salary.
Step 3: Exclude from taxable income any government student loans
When you take out a student loan, such as a Stafford loan, you have to pay the full amount back with interest. Therefore, even though your FAFSA lists these loans as part of your “award,” it is never treated as taxable income. However, when you begin repaying these loans, you may qualify for a student loan interest deduction if your income is not too high and you use the funds only for school-related expenses while in college.
Step 4: Evaluate any state financial awards you receive
Many states offer additional financial assistance to students who submit a FAFSA. Any award you receive from the state is subject to the same federal income tax treatment as awards from the federal government. For example, if you receive a grant from your state that you don’t repay, you treat it just like a Pell grant, which requires you to use the funds a certain way. All state-sponsored student loans are excluded from your taxable income as well.
The tax treatment of your FAFSA awards is the same even if you withdraw from the college at a later date, provided you initially use the funds to pay college expenses.
Remember, with TurboTax, we’ll ask you simple questions about your life and help you fill out all the right tax forms. With TurboTax you can be confident your taxes are done right, from simple to complex tax returns, no matter what your situation.
For more tax tips in 5 minutes or less, subscribe to the Turbo Tips podcast on Apple Podcasts, Spotify and iHeartRadio
Source: Read Full Article