April 02, 2021
IRS Releases Guidance on Taxability of Emergency Aid to Students
The Internal Revenue Service issued guidance this week on how students and higher education institutions should report pandemic-related emergency financial aid grants. The guidance indicates that while all pandemic-related emergency financial aid grants are not taxable, there are reporting requirements if grant amounts are used for tuition so the student and families can potentially claim credits and deductions.
According to the guidance, students should not reduce an amount of qualified tuition and related expenses by the amount of an emergency financial aid grant. If students used any portion of their grants to pay for qualified tuition and related expenses on or before December 31, 2020, they may be eligible to claim a tuition and fees deduction or the American Opportunity Credit or Lifetime Learning Credit on their 2020 tax return, subject to certain income cap limits.
The tuition and fees deduction was eliminated in recent stimulus legislation that consolidated and simplified several higher education benefits and is not available for tax years beginning after December 31, 2020. For additional information on these credits and the tuition and fees deduction, see Publication 970, Tax Benefits for Education on the IRS’s website.
Since students don’t include emergency financial aid grants in their gross income, higher education institutions are not required to file or furnish Form 1099-MISC reporting the grants made available by the stimulus bills and do not need to report the grants in Box 5 of Form 1098-T. But any amounts that qualify for the tuition and fees deduction or the American Opportunity Credit or Lifetime Learning Credit are considered “qualified tuition and related expenses” and trigger the reporting requirements of Internal Revenue Code section 6050S. Higher education institutions must include qualified tuition and related expenses paid by emergency financial aid grants awarded to students in Box 1 of Form 1098-T.
According to the guidance, students should not reduce an amount of qualified tuition and related expenses by the amount of an emergency financial aid grant. If students used any portion of their grants to pay for qualified tuition and related expenses on or before December 31, 2020, they may be eligible to claim a tuition and fees deduction or the American Opportunity Credit or Lifetime Learning Credit on their 2020 tax return, subject to certain income cap limits.
The tuition and fees deduction was eliminated in recent stimulus legislation that consolidated and simplified several higher education benefits and is not available for tax years beginning after December 31, 2020. For additional information on these credits and the tuition and fees deduction, see Publication 970, Tax Benefits for Education on the IRS’s website.
Since students don’t include emergency financial aid grants in their gross income, higher education institutions are not required to file or furnish Form 1099-MISC reporting the grants made available by the stimulus bills and do not need to report the grants in Box 5 of Form 1098-T. But any amounts that qualify for the tuition and fees deduction or the American Opportunity Credit or Lifetime Learning Credit are considered “qualified tuition and related expenses” and trigger the reporting requirements of Internal Revenue Code section 6050S. Higher education institutions must include qualified tuition and related expenses paid by emergency financial aid grants awarded to students in Box 1 of Form 1098-T.
For more information, please contact:
Karin Johns