Are Scholarships Taxable?
You know that feeling of pure joy and relief that comes with winning something you’ve worked so hard for? And you know that pit in the middle of your stomach when you realize that ‘winning’ comes with a catch? Yeah. That’s what many students experience when they learn their scholarships may be taxable.
But don’t panic. There are guidelines to help you determine if any of your scholarship award should be reported as income or not. And it’s probably not as bad as you think.
How to tell if scholarships are taxable income
Generally speaking, most scholarships are tax-free. If you can answer yes to the following questions, your scholarship is tax-free.
- Are you enrolled in a program leading to a degree at an accredited institution? This could be part-time or full-time.
- Are you using your scholarship for direct educational expenses, namely tuition, fees, books, supplies and required equipment?
If the answer to either of these questions is no, your scholarship—or a portion of it—could be considered taxable income. Let’s look closer at that.
Could my scholarship be taxable?
All or part of your scholarship could be considered taxable if the money is used for indirect expenses, such as room/board, optional equipment and even travel. In other words, NOT the tuition, fees, books, supplies and required equipment listed above.
And this is where you can get tripped up. If your scholarship is sizable enough to cover both tuition and room/board, for example, only the portion used to cover tuition is non-taxable. The rest should be declared on your income taxes.
Are grants and fellowships tax free?
Fellowships and grants typically adhere to the same rules as scholarships, meaning you must be working toward a degree, and awards that are used to cover direct educational expenses (e.g. tuition, fees, required books/supplies/equipment) are considered tax free.
When it comes to fellowships, they may include a stipend that acts as a form of ‘pay’ for academic or field research (or internship).
Any amount of fellowship or grant money used for incidentals, and anything you may get paid from the grant or fellowship for teaching, research or other related activities should be declared on your income taxes.
How to claim scholarship money on your taxes
You will need to include the taxable portion of your scholarship (the money you used for expenses other than those mentioned earlier) in your gross income at the time of filing.
Before we get into any trouble with our attorneys, we should disclose that we are not tax experts. So we won’t cross the line by giving you advice on which form to use, or how to file. But we will point you to the ultimate resource on this topic: the IRS.
They even have a robust tool (Interactive Tax Assistant) to help you calculate which part of your award may be considered taxable based on how you spent your scholarship dollars.
If you have more in depth questions regarding this topic, you may want to consult a tax professional.
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