Due to the many rules, taxation of higher education-related savings, costs, and interest expense is a complex area of law. Some rules are not compatible with each other. GAO and other studies have shown that many taxpayers don’t claim tax breaks they are eligible to because of the complexity. IRS Publication 970, Tax benefits for education, is 86 pages.
Sometimes, there are proposals for extending these benefits. These changes may cause students and their parents, as well as their parents, to seek out more logic in tax rules. H.R. 3803, Pell Grant Flexibility Act of 2019, is a bipartisan proposal. 3803, Pell Grant Flexibleibility Act of 2019. This bill amends SS117 so that any amount received as a Pell Grant does not count towards gross income. It is effective from 2019. The grant will not be taxable if it is used on goods or services other than tuition. See Congressman De Saulnier’s press release from 7/18/19. This proposal was also made at past sessions of Congress.
Discuss with students IRC Section 117. Explain to them what a student should do to ensure that a scholarship does not become income.
Students should find an example scholarship offered by their university. This will help them determine the tax treatment of the scholarship. Many universities offer scholarships to student-athletes to help with tuition and other costs. These scholarships may include taxable elements.
Ask students to research the benefits of a Pell Grant. Have them also read H.R. 3803 and explain how it affects the tax treatment of a Pell Grant. You might also want to present multiple scenarios in which students receive more than one scholarship. Then ask students to calculate how tax planning would reduce taxes if H.R. 3803 were enacted.
Students should evaluate Section 117 and/or H.R. 3803 using the AICPA Principles of Good Tax Policy. (also mentioned in the textbook Chapter 1).
SWFT Individuals: 4 and 5
SWFT Comprehensive 4 & 5
SWFT Essentials 4 & 10
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