According to the IRS, most college scholarships are not taxable if they are used for qualified education expenses. However, because a scholarship has a monetary value, there could be tax implications depending on the type of award. Below are some of the questions you might ask regarding your scholarships and taxes.
When are scholarships tax-free?
For a scholarship to be considered tax-free, you must be:
- Enrolled full or part-time at an accredited institution with a regular staff, student body, and curriculum.
- Using your scholarship for qualified expenses, including: tuition, fees, books, supplies, and/or other equipment required to pursue your degree.
If you are using your scholarship to pay for anything other than qualified expenses, it is considered income and you will have to pay taxes on the amount. Expenses that are not qualified include:
- Room and board
- Travel (i.e. study abroad)
- Research
- Clerical help or tutoring
- Fees, books, supplies, or equipment not required for your courses
If you used only a portion of your scholarship for tuition, that percentage will be tax-free. However, if you use the other part for room and board, that percentage will be taxed.
When are scholarships considered taxable income?
Typically, money used to cover tuition costs and direct education expenses, like scholarships, does not count as income for tax purposes, so you don’t need to report it on your tax return. But if the scholarship or grant money is being put toward unqualified expenses, things like study abroad or room and board, you will need to report it.
Work-study is a little bit different. It is treated like a job, so the money earned should be reported on your tax return. Similarly, if you receive a scholarship in exchange for teaching, doing research, etc., then the value of the scholarship should be reported as income.
Stipends are different from scholarships as they do typically count as taxable income.
Also, note that if the total amount you receive in scholarships is more than the cost of your tuition and qualified fees, you’ll need to report the difference on your tax return.
Are grants taxable?
As with scholarships, the tax treatment of a grant ultimately depends on how the funds are spent and whether they meet IRS requirements for tax-free educational assistance. Grants are usually need-based financial aid provided by the government, schools, or other organizations. Whether a grant is taxable depends on how the money is used. For example, a Pell Grant is generally not considered taxable income when the funds are used for qualified education expenses, such as tuition, fees, books, and required course materials. However, any portion of a grant used for nonqualified expenses, such as room and board, may be taxable and must be reported on the recipient’s tax return.
How to use Form 1098-T to report scholarships
When you file your tax return, you’ll use Form 1098-T, Tuition Statement that you receive to report how much you paid to your school for “qualified expenses” like tuition, enrollment fees, and required course materials during the year. It also shows the scholarships or grants that were paid directly to the school. The form will be used to determine which tax benefits you are eligible for as a college student.
Some of the key boxes to know on Form 1098-T include:
- Box 1: Payments received for qualified tuition and related expenses. This box shows the amount paid during the tax year for qualified education expenses, such as tuition and required fees. Taxpayers often use this figure when determining eligibility for education tax credits like the American Opportunity Credit or Lifetime Learning Credit.
- Box 5: Scholarships or grants. This box shows the total amount of scholarships, grants, including Pell Grants, and other educational assistance administered and processed by the school. If scholarships or grants exceed qualified education expenses, a portion may be taxable.
- Box 6: Adjustments to scholarships or grants from a prior year. This box reports changes to scholarship or grant amounts that were reported in a previous year and could impact a prior tax return.
Box 1 and Box 5 are generally the most important boxes for most taxpayers because they show qualified education expenses and scholarships or grants, which are key factors in calculating education-related tax benefits and determining whether any financial aid may be taxable.
Filing a tax return online with TaxSlayer is straightforward, and college students can typically file for free using TaxSlayer’s Simply Free option. Follow the step-by-step instructions, and TaxSlayer will input your answers where they belong on your return.
Can I get education tax credits if I have scholarships?
You may still qualify for a tax credit even if you receive scholarships from your school. The Lifetime Learning Credit and the American Opportunity Tax Credit can help offset the cost of qualified expenses that are not covered by grant or scholarship money.
Depending on your situation, you might qualify for one credit but not the other, or you may be able to choose which credit to take.
If you have student loans, you may also qualify for the student loan interest deduction.
