Through recently updated FAQs and a news release, the IRS clarified how students and higher education institutions should report pandemic-related emergency financial aid grants. Expanded to address new legislation, the revised guidance reaffirms the IRS’s original position that such grants are not taxable to students. It also confirms the December FAQ update that institutions do not report such amounts on Form 1098-T, Box 5. However, the FAQs provide additional clarification around Form 1098-T, Box 1 reporting.
The CARES Act directs higher education institutions to use certain funds allocated by the Department of Education to support students with expense and financial needs related to the COVID-19 pandemic. The IRS provided FAQs to students and institutions regarding the reporting and taxability of such amounts.
The Consolidated Appropriations Act, 2021 (Pub. L. 116-260), specifically the COVID-related Tax Relief Act, provided additional funding and specific guidance regarding the income tax treatment of emergency financial aid grants awarded to students. Section 277 states that a student does not include in gross income the emergency financial aid grants awarded under the CARES Act, or any other financial aid grant from a federal agency, state, Indian tribe, institution of higher education, or scholarship-granting organization for the purpose of providing financial relief to students enrolled at institutions of higher education in response to a qualifying emergency (i.e., an event related to the COVID-19 pandemic).
As a result of this statutory directive, the IRS revised its FAQs. Q&A 1 and 2 clarify that students do not include emergency financial aid grants in gross income. Q&A 3 and 4 address whether students may claim the American Opportunity Credit or Lifetime Learning Credit with respect to amounts paid with grant funds.
Q&A 5 and 6 generally direct higher education institutions not to report emergency financial aid grants on Forms 1099-MISC or 1098-T. However, Q&A 6 clarifies that for tax year 2021, higher education institutions must include in Box 1 any qualified tuition and related expenses paid with emergency financial aid grant funds. The Form 1098-T does not require separate identification of the portion paid with emergency financial aid grants, and higher education institutions do not report the grants in Box 5.