While scholarships won’t get you any tax benefits, their status as a form of free money financial aid makes them tax-exempt, which makes it easy for students to apply for their funding. It is important to look at the fine print when accepting tax-free scholarships, though, because, in certain circumstances, they can be taxable.
Are College Scholarships Taxable Income
Depending on what college or university you attend, your scholarship money may be considered taxable income. You must attend one of the schools that the IRS considers an eligible educational institution.
To see if your school is an eligible institution, you can go on the U.S. Department of Education’s Database of Accredited Post-Secondary Institutions and Programs (DAPIP) or the Federal Student Loan Program list. If your school or lender is not on one of these lists, you can always ask your school if they are an eligible educational institution.
Furthermore, scholarship funds are restricted to use only for qualified education expenses, which include the cost of tuition and other degree-related costs or other education-related expenses. Room and board and other living expenses are not qualified education expenses, so using the funds for these purposes will result in a portion of your scholarship being taxable.
Scholarships that are considered taxable income occur when all of the funds are not used toward eligible costs, such as tuition, course fees, and book expenses; thus, they cease to be tax-free scholarships. If you receive the funds in exchange for providing services like teaching, research, or even other non-qualifying college-related costs, then the funds become taxable at least the portion related to payment for your services is considered income.
While payments for services are taxable, amounts received for services mandated by the Armed Forces Health Professions Scholarship and Financial Assistance Program, the National Health Service Corps Scholarship Program, or a comprehensive student work-learning-service program (as defined by the Higher Education Act of 1965) do not have to be included in gross income.
How to report scholarships on taxes
Even if you are listed as a dependent on your parent’s tax returns, you usually have to claim the portion of the scholarship financial aid that is not tax-free on your tax return. If you have to file tax returns, the Internal Revenue Service (IRS) is a fantastic resource.
Depending on your income during the tax year, filing may be required.If you earned more than the standard deduction for your filing status, you normally have to file a return; however, there are some exceptions for those who can be claimed as dependents on other people’s tax returns.
You should file a federal income tax return even if you are not required to determine whether you are eligible for a refund. A part of the taxable portion of a scholarship or fellowship may be returned by the IRS if you are required to pay taxes on it.
Scholarship funds are subject to scholarship taxation, therefore they should be declared on taxes if they are deemed to be taxable income. Tax regulations state that a scholarship loses its tax-free status if it is not used for authorized educational expenses or if you are not enrolled in an approved educational institution. To put it another way, utilizing the entire amount for unapproved costs or attending an unofficial degree program renders the scholarships taxable, thus you should participate in some tax preparation.
What happens if you don’t report a scholarship on taxes?
Colleges will eventually find that they failed to correctly pay taxes if students fail to report a scholarship to the federal government. There are numerous ways for colleges to find out about the scholarships their students have won. Some scholarship providers co-pay the scholarship with the college, or they send the check directly to the college.To make sure you stay out of trouble with your college or the government, always make sure you are adhering to the guidelines of your scholarship.
How do I know if my scholarship is taxable?
To avoid paying taxes on a scholarship, you must be:
- Actively earning a degree and regularly attending classes.
- Attending an educational institution that maintains a regular faculty and curriculum.
- Attending an educational institution that has a regularly enrolled body of students in attendance at the place where educational activities are carried out.
- Using the scholarship money for qualified education expenses.
Should you not fit into these classifications, your scholarship can be subject to taxes. Should the funds be deemed remuneration for services rendered to be eligible for the fellowship, the grant or scholarship would also be subject to taxes.
Any payment received for instructing, performing research, or rendering other services under the Armed Forces Health Professions Scholarship and Financial Assistance Program, the National Health Service Corps Scholarship Program, or another qualified student work learning-service program is an exemption to this rule.
How to report a taxable scholarship
Generally, you’ll receive a W-2 form if you’re reporting a taxable scholarship because you utilized the funds for an eligible expense or because you were paid for services. The amount indicated as taxable income on Form 1040’s “wages, salaries, tips” line will then need to be reported.
It is still necessary for you to record this income on your taxes even if you do not receive a W-2. If you do not have this paperwork, you will fill on the 1040 form by writing “SCH” and the taxable amount on the dotted line next to the “wages, salaries, tips” line.
What other education tax credits and deductions exist?
College students have access to special tax credits and deductions while they’re in school or paying off loans. Here’s what you need to know about each program:
- American Opportunity Tax Credit (AOTC): This allows students to claim an annual maximum credit of $2,500 for the first four years of college if they meet the requirements. To get the full credit, they must have a modified adjusted gross income (MAGI) of $80,000 or less ($160,000 or less if married filing jointly). Credits are phased out for MAGIs of $80,000 to $90,000 ($160,000 to $180,000 for joint filers).
- Lifetime learning credit (LLC): This credit allows students to claim 20 per cent of the first $10,000 of qualified education expenses per year (with a maximum credit of $2,000). This can apply to students of all levels; undergraduate, graduate and professional degrees can qualify, with no time restriction. To receive the full credit, borrowers’ MAGI must be below $80,000 for single filers and $160,000 for married filing jointly. The amount is phased out for borrowers with a MAGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers).
- Student loan interest deduction: Students who used student loans to pay for school-related expenses may be eligible to deduct up to $2,500 in student loan interest paid during the previous year. To get the maximum amount, borrowers must have a MAGI below $70,000 for single filers and $145,000 for married filing jointly. Amounts are phased out for borrowers with a MAGI between $70,000 and $85,000 ($145,000 and $175,000 for joint filers).
IRS requirements for tax-free scholarships
Whether your scholarship is tax-free doesn’t depend only on qualified education expenses. The IRS has several conditions that must be met. For example, you must be a degree-seeking candidate and attend a “qualified educational institution.” Also, to be tax-free, the scholarship cannot:
- Exceed your qualified education expenses. (Sometimes, if your scholarship exceeds the amount of your qualified education expenses, you might have to report the excess amount on your tax return. So, whether your scholarship is tax-free in that example, depends in part on how much scholarship money you received.)
- Be designated for other non-qualified purposes (like room and board or travel).
- Represent payment for work or services performed by you as the scholarship recipient.
Is room and board taxable?
Perhaps the most notable of these IRS requirements is that the amount of a scholarship that is used for room and board will generally be taxable.
Take for example, a situation where you receive a scholarship for $15,000 and you use $8,000 of that money to cover tuition at an eligible education institution, but you use the other $7,000 to cover room and board. The $8,000 for tuition would be tax-free because tuition is a qualified education expense. However, the $7,000 for room and board would be considered taxable income that would have to be reported on your federal income tax return.
That might seem odd because most people might think of room and board as being required for a school or educational program. But again, what might be an education-related expense for you, might not be a “qualified education expense” in the eyes of the IRS.
As long as you are using the scholarships for their intended purpose of tuition, school fees or textbooks at a legitimate educational institution, scholarships are not taxed. You might run into situations of your scholarship turning into taxable income if you use it for other purposes like rent. Whether you find your scholarship is taxable or not, you might look into education tax credits or deductions to help you.
Frequently Asked Questions
1. Do scholarships affect your tax return?
The short answer is that sometimes scholarship funds can. Any scholarships or grants you receive for non-qualified expenses count as taxable income. This includes expenses like room and board and other fees not required by your school. You will need to pay taxes on these expenses. There are other types of scholarships and grants which are considered taxable income.
2. How do you report scholarships on taxes?
Generally, you report any portion of a scholarship, a fellowship grant, or another grant that you must include in gross income. If filing Form 1040 or Form 1040-SR, include the taxable portion in the total amount reported on the “Wages, salaries, tips” line of your tax return. If the taxable amount wasn’t reported on Form W-2, enter “SCH” along with the taxable amount in the space to the left of the “Wages, salaries, tips” line.