Posted by Income Taxes and Bookkeeping LLC

Is Scholarship Money Taxable?

Is Scholarship Money Taxable?

Your scholarship or grant may or may not be taxable. Generally, a scholarship or bursary is tax-exempt if you are a degree candidate. The award is used to pay for tuition, books, supplies, and equipment; however, some scholarship opportunities are not tax-exempt. Any amount used to pay for accommodation and meals or subsistence allowance is taxable. There are also a number of coordinating restrictions designed to ensure that you don't double the education tax benefits.

Scholarships or grants are one of the best forms of financial aid you can get. You don't have to pay them back, and you can avoid more expensive forms of help such as loans. But is there "free" money, or are you going to pay part of your scholarship funds as taxes? Well, it depends.

The Internal Revenue Service has guidelines for tax rules on scholarship payments.

What is a scholarship?

A scholarship is a type of financial aid that you do not have to repay. You can get scholarships from schools, employers, individuals, businesses, community organizations, and more.

The scholarships will reduce your academic expenses, and the awards vary in value. You may receive a few thousand dollars or the full cost of participation; it all depends on the scholarship conditions.

You may need to meet certain requirements to keep your scholarships during your studies. This could include maintaining a minimum GPA, playing for a particular sports team, serving as a teaching assistant, or working a certain number of hours.

What are the tax rules on scholarships?

Scholarships or grants are generally not considered income, so you will not pay tax on the scholarship you receive. However, there are a few rules:

  • You must be a graduate of a qualified educational institution.

  • You must use the money for eligible expenses, including tuition and fees, books, and course or degree-related fees (such as school supplies).

The money is not tax-exempt if:

  • For example, the money is given as compensation for teaching or other activities (as a teaching assistant).

  • You use it to pay for other college-related expenses, such as room, board, and travel.

These guidelines apply to all scholarships, fellowships, and grants. Also, if you receive a scholarship and don't have a bachelor's degree, that money is taxable.

Taxed scholarship funds

However, some scholarship funds are taxable. If you have money left over for the scholarship after eligible educational expenses have been covered, you must include this amount in gross taxable income. This means that the scholarship money was used to pay:

  • Rent or Board

  • Utilities

  • Other expenses (including school supplies that are not listed as required in the program) are considered income when calculating taxes payable.

Taxable scholarships

In some cases, a scholarship is actually considered a stipend, which pays for services while you are in school or for services you will provide in the future. If, for instance:

  • You receive a scholarship of $6,000, of which $2,000 is payment for your teaching services.

  • $2,000 is taken into account for your taxable income for the year.

  • The remaining $4,000 is generally not taxable as long as you are a graduate student at a qualifying institution and the money is used for qualifying educational expenses.

If you receive a conditional scholarship that you will provide future service, you must count the scholarship as income in the year it was received. Payment for service at a military academy also counts as taxable income.

Claiming Taxable Income

If the school considers a portion of your scholarship as taxable income, you must receive a Form W-2 from the scholarship provider showing the taxable portion on Schedule 1. You can report taxable income for your scholarship using form 1040.

Examples of taxable and tax-exempt scholarships

For example, if you received a $10,000 scholarship, spent $7,000 on tuition and fees, and $3,000 on room and board, that $3,000 would be considered taxable income.

Or say you're a graduate student making $15,000 to become a teaching assistant - all of that money would be considered taxable income, and you would receive a W-2 form from the school.

Your school will send you a Form 1098-T (likely in January) detailing the financial assistance that was applied to your tuition, including any scholarships and grants. When filing your taxes, you can use this form to find out how much you owe the IRS.

In general, most scholarships or grants are not taxable, although it depends on how you use the money.



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