If you are a full time student , with...

If you are a full time student , with no earned income but received financial ai

Posted in the Montross Forum


Phoenix, AZ

#1 Nov 16, 2013
If you are a full time student , with no earned income but received financial aid do you have to file taxes?Anita:

The IRS publishes a lengthy document called Publication 970 that provides every relevant bit of information about the tax treatment of financial aid. Publication 970 also explains the three forms of tax credits and deductions that a taxpayer can take advantage of if they pay expenses for post-secondary education. I've linked to that IRS publication, below, but I can fill you in on a few of the details.

Pretty much all forms of financial aid, whether they are Pell Grants, loans, scholarships, or money provided to you directly by the school itself are tax-free, and are not counted as income SO LONG AS those funds are spent on things known as "qualified educational expenses."

Qualified educational expenses are tuition, school fees, books, and supplies and equipment that your school requires everyone to purchase.

Common examples of "non-qualified educational expenses" are room and board, transportation, school supplies, health fees, and insurance.

If you receive financial aid, and that aid pays for your tuition or your books, that money is not considered income, you don't pay taxes on it, and you don't file a tax form to report it. If you file a tax form to report other income, you don't include the financial aid.

But now let's suppose that you receive financial aid - and that you use some of the aid to pay for qualified expenses, and some of the aid to pay for non-qualified expenses - or - in other words - some of your aid pays your tuition, and some of your aid pays for your dorm room.

In that case, you would need to report the amount of financial aid that paid for the non-qualified expenses as income on your tax return.

Here's an example:

You receive $20,000 in financial aid for the 2008-2009 school year. The total cost of your tuition is $12,000, the total cost of your college fees is $1000, and the total cost of your books is $1500. If you add the tuition, fees and books together, you'll see that you had a total qualified expense of $14,500 - which means that $14,500 of your financial aid paid for qualified expenses and $5500 paid for your dorm, your meal plan, and other types of non-qualified expenses. In this example,$5500 of your financial aid is counted as taxable income, and you would need to reflect that income on your tax return.

All of that being said - a taxpayer is not required to file with the IRS unless they earn more than a certain amount of income in that tax year. I can't give you a single number, because that minimum income depends on things like whether or not your parents claim you as a dependent on their tax returns. There is also one minimum income number for wages, and another minimum income number for non-earned income, like dividends or interest.

Because of the complexity of properly accounting for financial aid on your (and your parents') tax returns, I would always recommend that students consider consulting with an experience tax advisor, or, at the very least, investing the $40 in one of the popular tax preparation programs like TurboTax. Not only will you make sure that you are completing the form properly, but the program will also ask you the questions that will determine if you (or your parents) can take the Hope Credit, the Life Long Learning Credit or the Tuition and Fees deduction - all of which can potentially save you a good deal of money.

Good luck - I hope this information helped you.

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