If I used a portion of my Pell Grant for unqualified expenses, how do I report this as taxable income?

[useryodacrunchy]

My grant exceeded my tuition costs, and the excess was refunded by the school. How do I claim this as taxable income, since it was used for non-education expenses?

[KrisD15]

You should have received a 1098-T with the amount over expenses in Box 5. 

Regardless, the taxable income is entered under

Deductions and Credits

Education

Bypass the information from Form 1098-T if you are not entering one, until you get to a screen that asks for scholarships not already reported on your return. 

Enter the taxable amount here. 

The taxable amount will flow to Schedule 1 line 8r. 

[Hal_Al]

The total Pell grant is usually already included in box 5 of the 1098-T. When you enter your 1098-T, TurboTax (TT) will subtract the box 1 amount (and any additional books, computer and other course materials that you enter) to determine the taxable amount of the scholarship. 

If you had any grants, not already included in box 5, TT will ask about those after entering the 1098-T.

If your parents are claiming a tuition credit based on your 1098-T, on their return, you should eventually reach a screen called "Amount used to calculate education credit". Verify the amount in that box is $4000. That will reduce your qualified expenses and make $4000 more of your scholarship taxable.

For more detail, see:  https://ttlc.intuit.com/community/college-education/discussion/re-how-can-i-add-scholarships-and-gra...

[useryodacrunchy]

I did enter a 1098-T. So to clarify, since I already entered a 1098-T with Box 5 "scholarships or grants" in excess of box 1, I have technically reported the taxable income and do not have to enter it anywhere else?

[Hal_Al]

Q. Since I already entered a 1098-T with Box 5 "scholarships or grants" in excess of box 1, I have technically reported the taxable income and do not have to enter it anywhere else?

A. Yes. To verify that that happened look a line 8r on Schedule 1. That is where the taxable amount of scholarship is entered on the forms. From there, it transfers to line 8 of form 1040. 

[Hal_Al]

This education tax stuff can get complicated. For example, you haven't asked about you or your parents claiming a tuition credit. Just because scholarships paid for everything doesn't necessarily mean you're not eligible. 

There is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income, instead of $6000.