When it's Tax-Free
In some situations, you do not need to report a Pell grant on your tax return. In order to not report the grant, you must be enrolled in a educational or training program and use the entirety of the Pell grant only for qualified educational expenses. Qualified educational expenses include any payments for tuition, fees, books, equipment and supplies required for your courses. Room and board don't count as qualified expenses.
When it's Taxable
If you don't spend the entire Pell grant during the academic year or use some of it for other expenses, you must report income on your tax return. The amount you must report is the difference between your Pell grant and qualified educational expenses for the year. For example, if you received a $7,000 Pell grant but only incurred $6,500 of qualified expenses, you have $500 of income from the grant.
How to Report It
Report any excess, taxable Pell grant income as scholarship income on Form 1040. If you are using Form 1040 or 1040A, include the excess Pell grant income on line 7. If you are using Form 1040EZ, report the excess grant income on line 1. Don't combine the excess scholarship income with other taxable income. Instead, write "SCH" and the amount of the excess to the left of line 7 or line 1.
Other Tax Consequences
Receiving a Pell grant affects your opportunity to claim other educational credits and deductions. Each year, you will receive a Form 1098-T that details the total amount of tuition and fees billed during the academic year. Students that receive grants and scholarships must reduce the balance of their 1098-T by the amount of scholarships received that year. Most the time, box 5 of the 1098-T will contain the sum of all scholarships and grants received. However, if the box is blank or inaccurate, it is the student's responsibility to perform the calculation manually.