Why should I allocate my Pell Grant to room and board?

You might be able to boost your education credit and potentially increase your tax refund if the student (whether it's you, your spouse, or your dependent) elects to report all or part of any Pell Grants, certain scholarships, or fellowship grants as taxable income. This only works if the grant or scholarship can be spent on things other than tuition and fees, like room and board. Check the rules for your grant or scholarship to be sure.

If it's allowed, even if the school applies the money toward qualified education expenses like tuition, the student can still choose to allocate certain scholarships or grants to other costs, such as room and board. The amount used for non-qualified expenses becomes taxable income and may require filing a tax return, but it can increase your education credit and potentially your tax refund.

Example:
Your child has $5,000 in tuition expenses and $4,000 in room and board costs. They receive a $5,000 Pell Grant.

• If you apply the entire $5,000 Pell Grant to tuition, the qualified tuition amount for the American Opportunity Credit is reduced to zero, meaning you would not be eligible for the credit.
• If you instead allocate $4,000 of the Pell Grant to room and board, only $1,000 of the grant offsets qualified tuition. In this case, you may be able to claim a $1,000 refundable American Opportunity Credit and up to $1,500 as a nonrefundable education credit.

The $4,000 applied to room and board would be taxable income to your child and must be reported on their tax return. If your child is in the 12% tax bracket, this would result in $480 in additional federal tax. However, if your child's total income (including the taxable Pell Grant amount) is below the filing threshold, they would not need to file a tax return, and no additional tax would be owed.

See Chart B  from the Form 1040 instructions to see if your child needs to file a tax return.