Can anyone answer this tax question for me? I received a refund from a Pell Grant. I spent some on textbooks but the rest is in a savings account. I may use it in the future for qualifying educational expenses but I could always end up using it for unqualified expenses. Should I just claim the amount that’s in my savings as taxable income on my return, even though I may spend some of it on qualifying expenses? I don’t know what I will use it for yet and it’s just sitting there so I’m unsure how to handle that on my taxes. Thanks
Deleted to defer to the tax experts below 
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Thanks! That’s helpful
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Deleted to defer to the tax experts below
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Interest earned on the savings account is a different tax question.
You should have received a 1098 from your school. On a tax program (turbotax, taxact, etc) it will tell you the numbers to put into the program, usually from box 1 and box 5 of the 1098-T. There will also be a spot where you can add additional expenses for Qualified Educational expenses (QEE) like books, qualified supplies (art supplies for an art class, lab supplies like an apron or goggles, computer programs). If the amount you received in grants and scholarships exceeds the amount of QEE (tuition, fees, books, supplies), then that amount is taxable. You don’t necessarily pay taxes on it as it will depend on how much your other income is and you get a ~$13k standard deduction, but it is taxable. Once you include that amount in your taxable income for 2022, it is not taxable in the future. You’d have to include any interest earned on it, but it probably won’t be that much, in your regular tax filing, just like you would any interest earned.
If you keep the amount separate from other income and expenditures, you don’t have to include it as an asset when you file for FAFSA next time. Ex, if you received $2000 as an overpayment from the school (Pell grant, student loan, scholarship), and you don’t co-mingle it with other money, you can exclude that in October when you list your assets.
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@BelknapPoint @kelsmom is this true? Does it have to be in a separate account? Or does the student need to keep clear records of what was paid in financial aid so as not to include it on the FAFSA the following year? We kept a good accounting…but we never had a separate account…should we have?
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It doesn’t have to be kept in a separate account, but accounted for separately.
If you put it in a savings account and that balance only goes up, fine. If you put it in a checking account and the balance goes from $2000 to $1500 to $2000, to $500…it is much harder to proved that it wasn’t co-mingled. If you pay your rent on the 1st and don’t get paid until the 5th, it is going to be hard to show that those funds in your account are from your Pell grant and not current income.
Now are you really going to be audited to that extent? Probably not, but why not just put it in a savings account and not touch it?
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I don’t think that the OP is asking about anything related to the FAFSA. The question seems to relate to what would be claimed on taxes, and I don’t feel like the question makes enough sense for me to respond. Sorry. Maybe @BelknapPoint can decipher it enough to offer advice.
Depending on how much taxable earned income OP has for the tax year, it might not make any difference in tax liability if a refunded portion of a Pell Grant is spent on non-qualified expenses. And you will have all of the remaining tax year to find a qualified expense to spend the refund on, so you won’t be “claiming” any part of the refund that might be spent on non-qualified expenses until you complete your tax return at the beginning of the next year.
The key here for federal income tax is that any taxable scholarship or grant (that would otherwise not be taxable if it was spent on a qualified education expense in the tax year it was received) is treated as earned income, meaning that it’s covered by the standard deduction, even for taxpayers who can be claimed as a dependent on someone else’s return, up to the regular standard deduction. For single filers in 2022, that number is $12,950.
Bottom line: if you have taxable scholarship or grant money to report but your total earned income for the year is $12,950 or less (using the 2022 number for single filers), not spending all of your scholarship or grant money on qualified education expenses won’t cost you a dime in federal income tax.
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