Our undergraduate daughter recently received a refund from her university due to having an excess balance on her university student account, and we are wondering if the refund represents taxable income.
The excess balance came about as follows. In early May this year, tuition charges of ca. $7000 were posted to her student account. Several days later, I paid those tuition charges in full, because that was a prerequisite for her completing her summer course registration and the deadline was approaching.
About a week after I paid the tuition charges, $1524 in Pell Grant funds for our daughter’s summer-course tuition was posted to her university student account as well. Because her student account now had an excess balance, the university refunded $1524 to her private checking account.
Therefore we are wondering whether the $1524 refund that our daughter received represents taxable income?
It seems to me like it shouldn’t be taxable. Although the refund was disbursed in the exact amount of the Pell Grant, the only reason her account acquired an excess balance in the first place was because the university took too long to post the Pell Grant funds, so that I was forced to pay the full amount of tuition in order for our daughter to be able to finish registering for her summer courses; had the Pell Grant been posted to her account in a timely manner, I would not have paid as much tuition and her account would not have acquired an excess balance. But tax law is not known for being fair, so I wonder what the rule is here.
The Pell grant posting of $1,524 to your daughter’s account would have taken the place of an equivalent amount of personal funds (presumably) that you had already paid. The refund would therefore be a return of $1,524 in personal funds (presumably) and would not be taxable. If the $7,000 that you originally paid was from a tax-advantaged source (like a scholarship or a 529 account), it’s a different story. Hopefully that’s not the case, and your only problem is getting your daughter to turn over to you the $1,524 that was refunded to her private checking account.
Thank you for your message. The $7000 was taken from my normal checking account where my wages are deposited - definitely not tax-advantaged!
Of course, I understand and completely agree with your presumption that the $1524 represents a return of personal funds. But since it corresponds exactly to the amount of the Pell Grant and was refunded shortly after it was posted, I wonder if the IRS would agree with it? In other words, is the notion of the Pell Grant amount “taking the place” of the equivalent amount of personal funds within the same account a construct that the IRS would recognize as legitimate? (Sorry if this seems too hair-splitting – I don’t know anything about accounting rules pertaining to attribution or apportionment of account funds to their respective sources.)
Money is fungible. The IRS shouldn’t have any problem recognizing that a late crediting of the Pell grant to your daughter’s account resulted in an initial overpayment on your part that was then corrected when a portion of your personal funds was returned to you.
It’s definitely not taxable. Scholarships and grants are only taxable to the extent that they exceed tuition + fees + qualified costs (e.g., books). The fact that you paid first & then your daughter received a reimbursement when her Pell posted doesn’t make the refund taxable.
I see. Many thanks for your insights! That is very helpful to know.
Thank you for that information. Yes, that fits also with the fungibility point made by @BelknapPoint. Very good to know!