Ideally, scholarships and grants should not be taxable, which is good news for students. However, it is too early to rejoice as Uncle Sam might want a cut based on the amount you got and how you spend the money.
Scholarships from Schools
That you got a scholarship does not mean that there is a big check from someone to take care of your fees and tuition. When schools give out scholarships, they will typically cancel what you owe for the award's semester or year; hence, no funds exchange hands. You are schooling free of charge.
Comparing Scholarships and Grants
Grants or fellowship grants are directed for the payment of a particular research field. An exception is Pell grants which are needs-based. The recipient is in a horrible financial state that they need external support to make college possible.
Typically, these sources are not classified as income, even though one will be taxed based on some factors.
Where is your School?
Your school's location has a significant impact on whether you will pay tax on the scholarship or not. According to the IRS, if you want a tax-free scholarship, you must go to an "eligible educational institution," according to the IRS.
In other words, the primary aim of such an institution should be to provide education. There should be standard curricula, an active student body, and there is a facility targeted at learning.
Many schools available obey all these rules, so it is safe to assume your school qualifies. As long as the school is listed in the Department of Education, it allows.
One should not automatically assume that the school is not eligible if it is not listed on the Department of Education's contact list. Get in touch with the school to find out.
What is the Scholarship Financing?
The next approach is to determine what you want to use the funds for. Except you use the funds for qualified educational expenses, it will be taxed.
For instance, room and boards are not part of the qualified educational expenses. As a result, a part of the scholarship will be taxable as long as it pays for your fees and tuition and takes care of your accommodations and meals. Uncle Sam believes that room and board is income to you since it is directed to your personal needs.
As long as the tuition funds are spent on required books, equipment, and supplies, they are tax-free. "Required" in this sense means that the school or instructor made it compulsory to have such an item before you are allowed for a class.
Even though a laptop is essential to your school activities, you will have to pay some percentage of the scholarship funds as tax as long as the laptop is not required.
This also applies to medical expenses, groceries, transportation, and insurance premiums. They are not qualified expenses, which makes taxes important.
Did you use the entire Money?
You might be lucky to get as much as a $15,000 scholarship, but you only have $12,000 as the entire qualified expenses in the school you are attending. The outstanding $3,000 becomes taxable income.
Make sure to check the terms since some scholarships from private firms might be directed explicitly for not qualified expenses.
In case you got $15,000, which was spent solely on fees and tuition, the entire funds will be tax-free. Some factors will not make the scholarship funds taxable, provided you meet the rules.
The individual or party that gave the funds does not matter. Your grandfather can bypass gift tax if he pays your school money directly for your fees and tuition.
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Pat Raskob