Are Scholarships Taxable? Rules To Know Now

First, congratulations on winning that scholarship! You’ve made a great stride in paying for college and reducing your student debt. Now that tax time is approaching, you might find yourself asking, “Are scholarships taxable?” This is an excellent question! Most scholarships and grants are considered “free money” and not taxable, but there are exceptions. To get started, I’ve outlined when scholarships are taxable and additional tax filing tips.

When Are Scholarships Tax-Free?

Scholarships, grants and fellowships are not taxed when:

• You are seeking a degree at an eligible institution (full-time or part-time).
• Monies are used for tuition and fees for enrolling or attending that eligible school.
• Funds cover fees, books, supplies and equipment that are required for your courses.

When Are Scholarships Taxable?

Any grants or scholarships are taxable when monies are used for non-qualified expenses, such as:

• Room and board
• Travel
• Research
• Equipment not required for coursework
• Incidental expenses not related to enrollment

As an example, let’s say tuition is $15,000. Your student receives a scholarship for $10,000, all of which goes towards tuition, so it is not taxable. If the award is $20,000, and $15,000 is applied to tuition with the remaining $5,000 going to room and board, then that $5,000 must be reported as taxable income.

Also, a scholarship is taxable when a:

• Grant or fellowship requires a student to work in exchange for the award, such as a teaching assistantship. This is considered compensation, and even if it all goes to pay for tuition, fees and books, it is taxable. The student will receive a W-2 and need to file a tax return.
• Scholarship is awarded to a student who is not in a degree program; these are always taxable.

If you’ve gone through these steps and it is still unclear if the scholarship is taxable, ask the organization that sponsored the award as they may have information from the IRS regarding its tax status.

How Do I Report My Taxable Scholarship?

Generally, when reporting scholarship income on IRS Form 1040 or Form 1040-SR, you include the amount on the same line as “Wages, Salaries, Tips, etc.” For Form 1040-NR or 1040-NR-EZ, the taxable amount is reported on the “Scholarship and fellowship grants” line. 

Before you begin, make sure to thoroughly review IRS tax form instructions to determine how to report any scholarship and grant income accurately.

What About Education Tax Credits and Deductions?

When filing annual IRS taxes, families will want to take advantage of educational credits, such as the American Opportunity Credit and the Lifetime Learning Credit.

To determine if you are eligible for an Education Credit, use the IRS’s interactive tax assistant, which takes around 10 minutes. Keep in mind that there are rules and restrictions for claiming an Education Credit.

Also, depending on your situation and income, there may be a couple of deductions:

• Tuition and Fees Deduction
• Student Loan Interest Deduction

For more information and to see if you fall within IRS parameters, check the IRS Website, call the IRS helpline at 1-800-829-1040, or download the IRS Publication 970, which covers the tax benefits of education. Or talk to your accountant or tax professional.

Let Westface College Planning  Help You!

Do you need assistance figuring out if your scholarship is taxable, or with navigating any other aspect of learning how to pay for college? At Westface College Planning, we establish a college funding plan for your family, saving you time and money. Give us a call us at 360-818-7728 or start with our free Tackling the Runaway Costs of College Webinar!