Rep. Doggett's Tax Free Pell Grants Act ensures that students don’t lose out on the AOTC by mistake. Currently, Pell Grants are treated as tax-free income when used to cover tuition and fees, while any portion of a Pell Grant used for other education-related items like living expenses is taxed. But using Pell Grants to cover tuition reduces potential AOTC eligibility, creating a very complicated calculation for students in order to maximize their educational benefits. As a result, many simply forgo trying to claim the AOTC, leaving an estimated hundreds of millions of dollars unclaimed each year according to a report from the IRS. This bill increases Pell Grant compatibility with the AOTC by ensuring that Pell Grants are not treated as taxable income even if they are used for non-tuition education expenses.
