This depends on several rules.
How Scholarships Are Taxed
When you receive a scholarship, it doesn’t necessarily mean that someone wrote you or your school a big check to cover tuition and fees. Schools usually offset what you owe for the academic year when offering full scholarships rather than receiving money from a third party. In the practical sense, you are attending for free.
Where Will You Study?
The first qualifying rule for a tax-free scholarship relates to the educational institution you will attend. You must use the money to go to what the IRS refers to as a “qualified educational institution.”
What Does the Scholarship Cover?
You must then determine how you will use the scholarship funds. The money can only be applied to “qualified education expenses.” Otherwise, it is taxable.
Did You Use All of the Scholarship Funds?
Let’s take another example. What if a community organization awarded you a $10,000 scholarship, but the qualified expenses at the school you want to attend were only $8,500? That remaining balance of $1,500 would become taxable income.
What About Grants?
Grants are intended to cover specific costs for research or study. Pell Grants are an exception. They are need-based and assist students whose financial situation is so affected that they would not be able to attend college without this financial aid. This source of funding is not considered income, but it is taxable in some cases.
Money for Services
The reason you received the scholarship or financial aid is another critical factor. Was it because you were a star athlete in high school? That’s perfectly fine with the IRS. You can accept the money tax-free. The same applies if you maintain excellent grades to the extent that someone wants to reward you with an academic scholarship.
Other Factors to Know About Taxes and Scholarships
Some factors won’t automatically make your scholarship taxable, at least by themselves and if they comply with other rules. For example, it doesn’t matter who gives you the money. In fact, your grandparent can avoid paying gift tax if they give the money directly to your school on your behalf.
Frequently Asked Questions
Do college students need to file tax returns?
Attending school is not an issue when it comes to filing a tax return. The obligation to file depends on the amount of income you earned during the tax year. Generally, you must file if you earned more than the standard deduction for your tax situation, but there are special rules that apply to those who may be considered dependents on someone else’s tax return.
Who should claim scholarship money as income on their tax returns?
Typically, the student must report the non-tax-free portion of the scholarship on their own tax return, even if they are a dependent on their parents’ return.
Was this information helpful?
Thank you for your feedback!
Sources:
IRS. “What Is an Eligible Educational Institution?”
IRS. “Topic No. 421 Scholarships, Fellow Grants, and Other Grants.”
IRS. “Qualified Education Expenses.”
UNC School of Medicine. “Armed Forces Scholarships.”
Health Resources and Service Information. “NHSC Scholarship Program Overview.”
GovInfo.gov. “Higher Education Act of 1965.”
U.S. Department of Veterans Affairs. “About GI Bill Benefits.”
IRS. “Who Should File a Tax Return.”
IRS. “Publication 970, Tax Benefits for Education.”
Source: https://www.thebalancemoney.com/when-are-scholarships-taxable-4175156
Leave a Reply