The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) appropriated funding to the Department of Education, allowing, in relevant part, higher education institutions to use certain funds allocated by the Department of Education to support students and institutions with expenses and financial needs related to the COVID-19 pandemic. These provisions did not address the federal income tax consequences, if any, to the student recipients.
On May 7, the IRS posted FAQs addressing the tax treatment of these grants. Specifically, the FAQs provide that emergency financial aid grants under certain sections of the CARES Act will be excluded from the recipient’s gross income as qualified disaster relief payments under section 139 to the extent the grant funds are for unexpected expenses for food, housing, course materials, technology, health care or child care.
In addition, the FAQs clarify that students are also not eligible to claim any deduction or credit for expenses paid with the grant funds, including the tuition and fees deduction, the American Opportunity Credit and the Lifetime Learning Credit.