The Tax-Free Pell Grant Act would make federal Pell Grants completely tax-free by expanding how these grants are treated under the tax code (gross income exclusion). It also tightens the interaction between Pell Grants and education credits, ensuring that expanded Pell Grant benefits don’t get reduced by the American Opportunity Credit (AOTC). At the same time, the bill broadens what counts as eligible expenses for the AOTC and Lifetime Learning Credit (LLC). Specifically, it adds computer or peripheral equipment, child and dependent care expenses, and course materials to eligible costs, and it imposes a $1,000 cap on computer-related expenses that can be claimed under these credits. The changes apply to tax years beginning after December 31, 2024. In short: more Pell Grant tax relief, and broader education tax credits with new eligible expense categories (including tech and child care), plus a cap on computer-related costs under the credits. The bill also updates some administrative language to reflect the credit structure (as opposed to deductions) for these education benefits.
Key Points
- 1Pell Grants expansion: Pell Grants would be excluded from gross income when used for qualified tuition and related expenses, or simply as a Federal Pell Grant under the Higher Education Act, effective for tax years after 2024.
- 2Interaction with AOTC/LLC: The bill clarifies that a qualified scholarship described in the Pell Grant exclusion (117(b)(1)(A)) is treated consistently with the AOTC/LLC provisions, preventing double-benefit reductions from scholarships.
- 3Expanded AOTC eligibility: American Opportunity Credit would cover a broader set of costs, including tuition, fees, computer or peripheral equipment, child and dependent care expenses, and course materials.
- 4Expanded LLC eligibility: Lifetime Learning Credit would be adjusted to align with the expanded list of eligible expenses (tuition, fees, computer or peripheral equipment, child and dependent care expenses, and course materials).
- 5Computer equipment cap and definitions: For the education credits, computer or peripheral equipment, software, and internet access/services used by the student can be counted, but the total deductible/creditable amount for these items cannot exceed $1,000 per taxable year. The bill also defines computer equipment and related services and ensures internet access can count toward the credit, with certain use requirements. It also expands the term “child and dependent care expenses” to include services that enable enrollment, with rules aligned to existing child/dependent care credit concepts.
- 6Effective date: All changes to Pell Grants and the education credits apply to taxable years beginning after December 31, 2024.