Category Archives: American Taxpayer Relief Act

The Interaction of Pell Grants and Tax Credits

by Rebecca Lunnpell grant

Federally funded Pell Grants assist millions of students annually. However, for students with these scholarships, the process of claiming tax credits is complex and often confusing. As a result, students with the greatest financial need may be foregoing additional tax benefits available.

Based on an IRS publication (see link below), under current law a Pell Grant student can choose to allocate his or her Pell Grant funds either to qualified tuition and related expenses (QTRE) or to living expenses (up to the amount of actual living expenses), which constitutes taxable income. Most students and parents do not understand this option, so often families allocate all QTRE to the Pell Grant funds, leaving little or no QTRE to allocate to an educational tax credit.

For 2014, the American Opportunity Tax Credit (AOTC) provides a 100% credit for the first $2,000 of QTRE and a 25% credit for the next $2,000, for a total credit up to $2,500. As noted in the IRS publication, if a student’s QTRE exceeds scholarships by $4,000, the student would still qualify for the maximum AOTC credit. However, if the QTRE exceeds scholarships by less than $4,000, the student may benefit from including some of the Pell Grant in taxable income in order to claim a larger AOTC. It is important to note that any scholarship that is allocated to living expenses must be included in taxable income on the student’s (not the parent’s) tax return.

If you need additional assistance in understanding how to obtain the maximum tax benefit with a Pell Grant scholarship, the tax department at Langdon & Company LLP is pleased to assist.

Please click here for detailed examples of the interaction of Pell Grants and tax credits.

Rebecca Lunn (rlun[email protected]) is a Senior in our Audit Department working primarily with the non profit, and health care industries.

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Summary of The American Taxpayer Relief Act

On the first day of the year 2013, the United States Congress passed House Resolution 8, better known as the American Taxpayer Relief Act (ATRA) of 2012. Aside from preventing a headlong dive off the proverbial fiscal cliff, ATRA extends some of the Bush-era tax cuts and introduces new provisions that may or may not help to curb the budget deficit and stimulate the American economy.

Langdon & Company LLP have experienced Raleigh tax service professionals available who understand the tax laws and how they may impact individuals or specific businesses.

Continue reading Summary of The American Taxpayer Relief Act