‘Are College Scholarships Taxable?” Acquiring a scholarship is a significant accomplishment and can be one of the most effective ways to reduce the cost of college. Most scholarships are not taxable income, so your free money should not affect you come tax time. However, it’s critical to understand how scholarships, grants, and fellowships can affect your tax returns.
To avoid taxation, you must generally use the scholarship to attend school and use the money for direct educational purposes such as tuition, student fees, or class books. Outside of those circumstances, the scholarship becomes taxable income.
Are College Scholarships Taxable
Are College Scholarships Taxable? Typically, scholarships that pay for qualified educational costs at eligible educational institutions aren’t considered taxable income. The same applies to grants received to pay for specific schooling costs.
In short, whether scholarships are taxable depends on how much you receive and how you spend the funds. Some scholarships can be at least partially taxable.
Your scholarship could be taxable or not. A scholarship or fellowship is generally tax-free if you are a degree candidate and the award is used to pay for tuition and required fees, books, supplies, and equipment; however, some scholarship and fellowship opportunities are not tax-free.
Any money spent on room and board or a stipend for living expenses is taxable. There are also several coordination restrictions in place to prevent you from taking advantage of the education tax benefits twice.
How can I avoid paying taxes on scholarships?
To be completely tax-free, scholarships must be used to pay qualified educational expenses at qualified educational institutions. Scholarship funds may exceed this amount in some cases. Scholarship funds used for non-qualified expenses, such as room and board, are typically taxable income.
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How do I find out if my scholarship is tax-deductible?
You must do the following to avoid paying taxes on a scholarship:
- Earning a degree and attending classes regularly.
- Attending a regular faculty and curriculum-based educational institution.
- Attending an educational institution with a regularly enrolled student body at the location where educational activities are carried out
- Utilizing scholarship funds for qualified educational expenses
Your scholarship may be taxable if you do not fall into one of these categories. If the money is considered payment for services rendered in exchange for the fellowship, the scholarship or grant is also taxable.
What is the proper way to report a taxable scholarship?
You’ll typically receive a W-2 form if you’re reporting a taxable scholarship—either because you received payment for services or because you used the money for a non-qualified expense. The amount listed as taxable income will then be reported on the “wages, salaries, and tips” line of Form 1040.
Even if you do not receive a W-2, you must report this income on your tax return. If you don’t have this document, enter “SCH” and the taxable amount on the 1040 form’s dotted line beside the “wages, salaries, tips” line.
Scholarships are not taxed as long as they are used for their intended purpose of tuition, school fees, or textbooks at a legitimate educational institution. If you use your scholarship for other purposes, such as rent, you may find that it becomes taxable income. Whether your scholarship is taxable or not, you may be able to benefit from education tax credits or deductions.