Emergency Financial Aid Due to the Coronavirus Pandemic Is Tax-Free
Qualified disaster relief payments are excluded from income under section 139 of the Internal Revenue Code of 1986 [26 USC 139]. Emergency financial aid grants to students under the CARES Act and from scholarship providers and other organizations qualify for this tax-free treatment.
In addition to being exempt from federal income taxes, qualified disaster relief payments are not subject to employment taxes, such as Social Security and Medicare taxes (FICA).
Emergency financial aid may be considered a qualified disaster relief payment if it is payment is made to or for the benefit of an individual for reasonable and necessary personal, family, living or funeral expenses as the result of a qualified disaster.
Payments by federal, state or local governments or their agencies for general welfare in connection with a qualified disaster may also be considered a qualified disaster relief payment, but only to the extent that the expenses are not covered by insurance.
Qualified disasters include a federally declared disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. The President declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act on March 13, 2020.
The emergency financial aid grants to students in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) will qualify for tax-free treatment. This includes the emergency financial aid grants to students provided through the Higher Education Emergency Relief Fund (HEERF) in Section 18004 of the CARES Act and the Federal Supplemental Educational Opportunity Grants (FSEOG) in Section 3504 of the CARES Act.
In addition, emergency financial aid programs sponsored by scholarship providers, colleges and other organizations in connection with the coronavirus pandemic will be tax-free.
The recovery rebate checks are already tax-free because the stimulus checks are an advance refund of a tax credit and therefore not taxable income. The student loan payment pause and interest waiver is also tax-free.
[Update: The IRS has confirmed that emergency financial aid grants to students are not included in income.]
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