Posted by Valderas Financial Solutions LLC

Tax Implications of Scholarships for College Students

Tax Implications of Scholarships for College Students

It’s definitely an exciting journey to go off to college to widen your horizons, learn new things, and meet new people. But what makes education even better is when you get to do do it via scholarships. Scholarships typically are the reason why you are able to find a path to education that might not be feasible otherwise. The Internal Revenue Service understands how essential scholarships are to a lot of enthusiasts so they made sure to minimize the tax obligations of students. However, scholarship money can sometimes count as income and finding of whether your scholarships add to your tax liability is better instead of being surprised later on. Here’s how to understand your scholarship taxation.


If you’re a student working toward achieving a degree in college, university or other accredited educational institution, you can avoid paying taxes most of the time or on at least some of your scholarship funds. Generally, you won’t have to pay tax on scholarship money used to pay for basic expenses in connection to your education. The IRS named these “qualified education expenses.”


Included in these expenses are the following:


  • Tuition and student fees
  • Also included are books and any required equipment or supplies for your courses


Your scholarship funds, therefore, are used to pay for access to classes or for special supplies that your school asks you to buy to complete a course. There is a high chance that you won't have to count these funds as income or be liable to pay tax on them.


Taxed Scholarships Funds


There are indeed some scholarship funds that are subject to taxation. For those who have scholarship money left over after paying for their qualified education expenses, that amount must be included as part of your gross taxable income. The scholarship money is actually used to pay:


  • Rent or board
  • Utilities
  • And all other expenses such as school supplies not mentioned as required in your program are considered as income when determining your tax liability




Taxable Stipend Scholarships


Scholarship in some cases is considered as more of a stipend. It provides compensation for services you’re in college or for services you’ll provide in the coming years. Let’s say for example you were given a $5,000 scholarship and $1,500 of it is meant to pay for your teaching services. The $1,500 will placed towards your taxable income for the year while the remaining $3,500 is typically not taxable if you’re a degree student at a qualifying institution and the money is utilized for qualified education expenses. For scholarships with the condition that the receiver must provide services in the future, the scholarship must be counted as income in the year you receive it. Also counted as taxable income is payment for services at a military academy.


Claiming Taxable Scholarship Income

The scholarship provider will give you a W-2 if part of your scholarship is taxable and it contains the taxable portion in box 1. The Form 1040 or 1040A on line 7; Form 1040EZ on line 1; Form 1040NR on line 12; or Form 1040NR-EZ on the “scholarships and fellowship grants” line are used to report your taxed scholarship income.

If you want to know the step-by-step process, you can consult an experienced tax professional to guide you in completing the right forms and help you figure out how much of your scholarship is taxable so you can get the maximum tax refund.


As for international students, you amy consult the following publications found in the IRS website:


  • IRS Publication 901: U.S. Tax Treaties
  • IRS Publication 513: Tax Information for Visitors to the United States
  • IRS Publication 515: Withholding of Tax on Nonresident Aliens and Foreign Entities
  • IRS Publication 519: U.S. Tax Guide for Aliens


Among these publications, you will find the most important information for international students in IRS Publication 901 since the taxability of scholarships is usually governed by certain tax treaties with the student’s home country. You may also order copies of these publications by calling the IRS Forms Distribution Center at 1-800-TAX-FORM (1-800-829-3676) or visit the IRS website. If you have any more questions you can also directly call the IRS taxpayer’s assistance center at 1-800-829-1040.



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