Is a Scholarship Taxable?

Taxable ScholarshipsIt’s tax season, and time to organize and gather all your financial papers.  If you’re a college student or a recent graduate that has received a scholarship over the past year, you may owe taxes on it.  Typically, scholarships are known as “free money”, but there are certain circumstances that require students to claim the scholarship benefit as income, which is taxable.

Scholarships issued to degree-seeking candidates at eligible educational institutions are tax-free to the extent that the money is dedicated to qualifying educational expenses.  A scholarship is tax-free only as long as students use it for the following purposes:  

  • You are a full-time or part-time student seeking a degree at a primary, secondary or accredited post-secondary institution.
  • The award covers tuition and fees to enroll in or attend an educational institution.
  • The award covers fees, books, supplies and equipment required for your courses.

However, if a student uses a scholarship for room, board and/or travel, the student will have to pay taxes on it.  For example, if the student is awarded a scholarship that covers both tuition and room and board, the amount the student uses for tuition is tax-free while the amount used for room and board is taxable.

There are also a variety of coordination restrictions intended to ensure students don’t double-dip when taking advantage of the Education Tax Benefits.

No Degree?

Scholarship income awarded to college students who are not seeking a degree must always be reported as taxable income, regardless of the amount of qualified educational expenses.  Remember: Scholarship income is included in the total income for the year and must be declared.

Generally when reporting scholarship income on your tax return, you will include the amount on the same line as “Wages, Salaries, Tips, etc.”  Make sure to review the instructions on the tax form to determine how to report any income from scholarships.

If you’re not sure if the award is taxable, ask the organization that sponsored the award.  They may have information from the IRS regarding the award’s tax status.

You can also seek information directly from the IRS. Check the IRS Website, call the IRS help line at 1-800-829-1040, or download the IRS Publication 970, which covers the tax benefits of education.

Westface College Planning can help you navigate the college planning process from start to finish. To learn how we can help you call us at 650-587-1559 or sign up for one of our Tackling the Runaway Costs of College Workshops or Webinars.

Photo Credit: Ken Teegardin

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