Posted by Tiffany Gaskin

Tax Implications of Scholarships and Grants

Tax Implications of Scholarships and Grants

Going to university to broaden your horizons is interesting, but funding your studies with scholarships? It's even better. Scholarships often offer an educational path that would not be viable otherwise, which is why the Internal Revenue Service (IRS) can be generous in minimizing student tax responsibilities. But sometimes scholarship money counts as income, and it's better to know now if your scholarship increases your tax liability than to have a surprise later. 


Taxable

Some scholarship funds are taxable. If the scholarship money remains after paying eligible tuition fees, you must include this amount in your gross taxable income. This means that the scholarship money is used to pay:

  • Amounts received as payment for tuition, research, or other services required as a condition for receiving the grant or scholarship. However, no amount has been received for services required by the National Health Service Corps Scholarship Program, Financial Aid Program for the Health Professions, the Armed Scholarship, and the comprehensive student work-learning service program managed by an operating university.

  • Amounts used for unforeseen expenses, such as accommodation and meals, travel, and optional equipment.


Non-Taxable

If you receive a grant, scholarship, or other forms of grants, some or all of the amounts you receive may be tax-exempt. Grants, scholarships, and other grants, and other scholarships are tax exempt if you meet the following conditions:

  • The sums received are used to pay tuition fees and registration or school attendance fees or to purchase books, materials, and equipment necessary for school courses.

  • You are a candidate for a degree from an educational institution that maintains a regular faculty and study program. It generally has a body of regularly enrolled students who participate in the location where you carry out your educational activities.


Taxable scholarships

In some cases, a scholarship is more of a salary, which provides compensation for services while you are in school or for services you will provide in the future. If, for example, you receive a scholarship of $ 5,000, of which $ 1,000 is used to pay for teaching services. The $ 1,000 is calculated for your taxable income for that year. The remaining $ 4,000 is generally not taxable as long as you are a graduate student at an eligible institution, and the money is used for eligible educational expenses.

If you receive a scholarship on the condition that you provide services in the future, you should consider it as income in the year you receive it. Paying for service in a military academy also counts for your taxable income.


Non-taxable scholarship fund

In most cases, students seeking a degree from a college, university, or other accredited educational institution can avoid paying taxes on at least a portion of the scholarship funds. In general, you will not have to pay taxes on the scholarship used to pay for basic education expenses. The IRS calls them "eligible education expenses."

These costs include:

  • Fees and taxes for students

  • In addition to books and any equipment or materials needed for your courses.

This means that if scholarship funds are used to pay for access to special education or materials that your school requires you to purchase to take a course, you may not need to consider these funds as income or remuneration or pay taxes on them.


Claiming Taxable Scholarship Income

If any portion of your scholarship is taxable, you should receive a W-2 from the scholarship provider indicating the taxable portion in box 1. You can report taxable income from the scholarship using Form 1040.


How to report your taxable income

Usually report any part of a grant, scholarship, or other grants that you need to include in your gross income as follows:

  • If you are completing Form 1040 or Form 1040-SR, please include the taxable amount in the total amount shown on the "Salaries, wages, and tips" line of your tax return. If the tax base was not entered on the W-2 form, enter "SCH" with the tax base in the space to the left of the line "Salaries, wages, and tips."

  • If you complete Form 1040-NR or Form 1040-NR-EZ, enter the taxable amount in the "Grants and Contributions" line.


Estimated tax payments

If part of the grant or scholarship is taxable, you may need to estimate the payment of additional taxes. 


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THANKS FOR VISITING. 

Tiffany Gaskin
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