Qualified emergency financial aid grants for student COVID-19 relief are nontaxable
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, includes a provision that excludes qualified “emergency financial aid grants” from a student’s gross income. This exclusion applies to emergency financial aid grants for unexpected expenses related to the COVID-19 pandemic, as well as expenses related to the pandemic-related disruption of campus operations, such as food, housing, course materials, technology, healthcare, or child care.
Qualified emergency financial aid grants include:
- Supplemental educational opportunity grant funds used for emergency aid;
- Funds made available to higher education institutions under the Higher Education Emergency Relief Fund (HEERF) to directly support students facing urgent needs related to the COVID-19 pandemic; and
- Any other emergency financial aid grant made to a student from a federal agency, a state, an Indian tribe, a higher education institution, or a scholarship-granting organization for the purpose of providing financial relief to students enrolled at higher education institutions in response to a qualifying emergency.
Additionally, the December 2020 Consolidated Appropriations Act established the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA), which provided additional funding to higher education institutions through HEERF II. Unlike the CARES Acts, the CRRSAA required that institutions prioritize students with “exceptional need” when awarding these grants – such as students who received Pell Grants – and authorized grants to “students exclusively enrolled in distance education.” (Read more about HEERF II grants in the Department of Education’s FAQ.)
The IRS has published an FAQ page with additional tax-related information on these emergency grants.
In addition to being excluded from gross income, these funds also do not reduce the amount of qualified tuition and related expenses taken into account in calculating a student’s American opportunity (AOTC) and lifetime learning tax credits.
If a student received an emergency financial aid grant and used some of it to pay for course-related books, supplies, and equipment that were required for online learning because of college or university campus closures, the student may claim the American opportunity credit or – only if the materials were required to be purchased from the student’s college or university – lifetime learning credit for these expenses if the student otherwise meets the requirements for the credit. (And, if the student does not claim one of those credits and the materials were required to be purchased from the institution, the student can claim a deduction for tuition and fees for these expenses paid on or before Dec. 31, 2020.)
Higher education institutions are not required to file or furnish Forms 1099-MISC reporting these emergency financial aid grants, and do not need to report them in Box 5 of Form 1098-T. However, any qualified tuition and related expenses paid with these grant funds must be included in total qualified tuition and related expenses reported in Box 1 of Form 1098-T.
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The CARES Act provided additional funding to higher education institutions to make these emergency cash grants available to eligible students, to help them pay for their college’s cost of attendance or for emergency costs that arose due to the pandemic.
Institutions of higher education are subject to Form 1098-T information reporting requirements for payments made with emergency financial aid grants awarded to students to cover qualified tuition and related expenses under the CARES Act or under the CRRSAA.
Higher education institutions should act now if they received funds from the U.S. Department of Education as part of HEERF to ensure they comply with the reporting requirements and maintain appropriate documentation of allocated funds to eligible students.
For more information, visit the IRS’s FAQ page.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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