With the cost of college tuition on the rise, more and more students and families are looking for scholarships to help pay for school.
It can be hard to know if scholarships are taxable or not.
This article will answer the question, “Are Scholarships Taxable?” and provide you with all the information you need to know about this topic.
Are Scholarships Taxable? In general, scholarship money is not taxed as taxable income so long as (a) you are enrolled in school and (b) you use the funds for tuition, fees, or anything else that the IRS considers a “qualified education expense.” These include books and equipment required for your course of study.
Are Scholarships Taxable?
You may also be able to use the scholarship money for room and board under certain circumstances. When Scholarship Money is Taxable If you withdraw from school or drop below half-time enrollment, any scholarships that you received will become taxable because you will no longer be using them towards qualified expenses.
You can get around this by enrolling in a less expensive educational institution or becoming a part-time student. If you can show proof that your main reason for attending school is to obtain a degree, half-time status does not apply when determining whether scholarships are taxable.
Otherwise, it will be assumed that your enrollment was due to the completion of a course rather than educational advancement.
How Scholarship Taxation Works
When you receive any scholarship money, it is not taxable income. But you have to do something with the money in order to show that you are using your scholarships for qualified expenses related to your education.
Graduate student financial aid is more of a gray area when it comes to taxation, regardless of the campus scenario. The same basic principle applies: scholarship funds spent on tuition or required materials are not taxable, but teaching stipends and fellowships may carry their own tax consequences.
If your scholarship money is used to pay for access to classes or specialized supplies that your institution demands you to purchase in order to successfully complete a course, you won’t have to include these funds as income or pay tax on them.
As per the IRA’s website here is how it works.
If you receive a scholarship, fellowship grant, or other type of grant, the money you get may be tax-free. If you fulfill the following conditions, your scholarships, fellowship grants, and similar aid are tax-free
- You’re a candidate for a degree from an institution that has a faculty and curriculum and regularly has a body of students in attendance where it conducts its educational activities; and
- The amounts you receive are used to cover the cost of tuition and fees required for enrollment or attendance at a university, as well as course-related fees, books, supplies, and equipment.
In addition, you must include in gross income:
- The remaining amount will be the money you needed to pay your bills in June. Incidental expenditures such as room and board, transportation, and optional equipment are all examples of this category.
- Payments for teaching, research, or other services required as a condition for obtaining the scholarship or fellowship grant are not taxable. However, you must include in income any payments you receive for services that are necessary to fulfill a National Health Service Corps Scholarship Program obligation, an Armed Forces Health Professions Scholarship, and Financial Assistance Program requirement, or a comprehensive student work.
How To Report Scholarship Amount In Federal Taxes?
Assuming that you are using your scholarship funds towards qualifying educational expenses, there is no need to report your scholarships to the IRS. However, you can include your scholarship money as part of your gross income on line 21 of form 1040. From there you will subtract out any qualified expenses (i.e., tuition and fees), and that is how much you actually pay taxes on.
If the amount of your scholarship exceeds what it would cost to pay the educational expenses related to your degree program, you can save up the remaining funds in a custodial account. If this money is not used for higher education by the time you turn 30 (the age at which you graduate and must use all qualified school-related expenses), it will become taxable.
If you are a US-based foreign student and participate in a scholarship, fellowship grant, or other monetary awards that is taxable, you generally must include the portion of the scholarship, fellowship grant, or other financial rewards that you must report in your gross income as follows:
- Include the taxable portion of your pay in the total amount reported on Form 1040 or Form 1040-SR. If you didn’t receive a W-2 because you were self-employed, enter “SCH” and the taxable amount in the space to the left of the “Wages, salaries, tips” line.
- Report the taxable amount on the “Scholarship and fellowship grants” line of Form 1040-NR if filing it.
- If the institution considers part of your award taxable income, you should receive a W-2 from the scholarship’s sponsor. You can report your taxed scholarship money on Form 1040.
State Taxes On Scholarship
A scholarship/fellowship that is not used for qualified costs is taxable income. Even though the payments are taxable in the state, at present no state taxes are required to be withheld by the University, which might change in the near future.
A scholarship is tax-free because it does not come from your job. It’s a gift meant to help you in your education. The only thing that is taxed in a scholarship is if it is required for service, such as being a nurse or military person in the armed forces.
Make sure that in your job contract, there isn’t anything saying that part of your payment will go towards paying taxes on an award scholarship because it will be taxed as income.
I hope this article has helped you figure out whether or not those scholarships and grants are taxable. If not, you can always check the IRS website for any hazy situations that might pop up.