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It’s exciting to go off to college to expand your horizons, but supporting your education through scholarships is even better. Scholarships also provide a route to college that otherwise would not be possible, which is why the Internal Revenue Service ( IRS) can be generous in decreasing the tax obligations of students.
But sometimes scholarship money counts as income, and if your scholarship adds to your tax liability, it’s easier to find out now than to have a problem later on. Here’s how to decode whether your scholarship is taxable.
What part of a scholarship is taxable?
If you’re a full-time or part-time student for a degree at a qualifying educational institution, your scholarship or fellowship is tax-free. It may be a school that is primary, secondary, or post-secondary although what the award can be used for and still be tax-free has very clear limits. If used solely for tuition, fees, books, supplies, and equipment that are all required for your classes, your scholarship or fellowship may be considered non-taxable.
That portion is taxable if any part of your award has been used for room and board, lodging, study, administrative support, or equipment. So, the amount spent on room and board is considered taxable if your scholarship includes tuition as well as room and board, while the amount spent on tuition is not.
Is scholarship taxable income?
Students working for degrees at a college, university, or other accredited educational institution will stop paying taxes on at least some of their scholarship funds much of the time. Usually, you won’t have to pay tax on scholarship money used to pay for your education-related basic expenses. These are called “qualified education expenses” by the IRS.
These expenses include:
- Tuition and student fees
- As well as books and any required equipment or supplies for your courses
This suggests that you generally won’t have to classify these funds as taxes or pay tax on them if the scholarship funds are used to pay for admission to courses or special materials that the school needs you to purchase to complete a course.
However, some scholarship funds are subject to taxes. You must add the number as part of your total taxable income if you have scholarship money left over after paying your eligible college expenses. That means scholarship money used to pay for:
- Rent or board
- Utilities
- And other expenses (including school supplies not listed as required in your program) counts as income when calculating your tax liability
How much taxable scholarship report as income?
Enter the amount of any college grant and scholarship aid that you (or if married, your spouse) reported as income to the IRS for 2019 (See IRS Publication 970 “Tax Benefits for Education”).
Types of college grants and scholarships that might have been reported to the IRS include:
- grants;
- scholarships;
- waivers/remissions;
- fellowships/assistantships (grant or scholarship portions);
- AmeriCorps education awards;
- AmeriCorps living allowances (but not insurance or childcare payments); and
- AmeriCorps interest accrual payments (for student loan interest that accrued during your AmeriCorps term of service).
Round to the nearest dollar and don’t include commas or decimal points. Don’t report here any items included elsewhere in the “Student’s Additional Financial Information” fields.
Generally, you report any taxable portion of a scholarship, a fellowship grant, or another grant as part of the “Wages, salaries, tips” line of your tax return. See IRS Publication 970 for more information.
Do I have to report a scholarship on my taxes?
If a tax-free scholarship or fellowship is your only income, you’re in the clear. There’s no need for you to file a tax return or disclose the money. However, you must report it if any or part of your scholarship is taxable even if that money is not reported on your W2 form.
How do you report scholarship/financial aid on taxes?
Generally, you report any portion of a scholarship, a fellowship grant, or other grants that you must include in gross income as follows:
If filing Form 1040 or Form 1040-SR, include the taxable portion in the total amount reported on the “Wages, salaries, tips” line of your tax return. If the taxable amount wasn’t reported on Form W-2, enter “SCH” along with the taxable amount in the space to the left of the “Wages, salaries, tips” line.
If filing Form 1040-NR or Form 1040-NR-EZ, report the taxable amount on the “Scholarship and fellowship grants” line.
Who reports the taxable portion of a scholarship?
It depends on a variety of considerations. Understand that two distinct determinations are to find out who claims the pupil as a dependent and decide who claims the tuition expenses & credits. As illustrated below, it depends on the particular case.
If the student:
- Is under the age of 24 on Dec 31 of the tax year and:
- Is enrolled in an undergraduate program at an accredited institution;
- Is enrolled as at least a half time student for one academic semester that begins during the tax year, (each institution has its definition of a half time student); and
- the student provides less than 50% of the student’s support (scholarships/grants received by the student do not count as the student providing their support),
Then:
- The parents will claim the student as a dependent on the parent’s tax return;
- The parents will claim all scholarships, grants, tuition payments, and the student’s 1098-T on the parent’s tax return; and
- The parents will claim all educational tax credits that qualify.
If the student files a tax return and the parents qualify to report the student as a dependent, then the student must choose the option on the student’s tax return for “I can be claimed on someone else’s return.” Even if the parent is entitled to claim the student as a dependent, the student must choose this option, and the parents do not claim them.
Now here’s some additional information that may or may not affect who files the 1098-T.
The parent will understand this when disclosing the education on their tax return if the amount of scholarships/grants exceeds the number of eligible college expenditures, then the parent will not apply for any of the tax credits. (They are only eligible for tax credits based on qualifying out-of-pocket costs not covered by scholarships/grants.)
Also, depending on their MAGI, which is different from each credit, and depends on the marital status of the parent or parents, the parents would not count for the credits.
In the case where scholarships/grants cover “all” eligible education expenditures, the parents do not need to disclose educational data at all on their dependent student, but if they “qualify” to claim the student, they also claim the student as a dependent.
If the scholarships/grants surpass the eligible educational expenses, then on the student’s tax return, the student will disclose the 1098-T and all other educational expenses and scholarships/grants. For the number of scholarships/grants that are not used for eligible college expenditures, the student may pay taxes.
If, however, the student’s earned income reported on a W-2 does NOT exceed $6100 when compared to the excess scholarship grants, then the student does not even have to file a tax return, and nothing needs to be reported.
If the student has some other taxable income not stated on a W-2, and it reaches $400 (not including the taxable component of scholarships/grants), then it is most likely assumed to be income from self-employment. That will include the filing of a tax return and the student will have to pay on that income the Self-Employment Tax.
Finally, regardless of the student’s W-2 earnings, if any taxes on those earnings were deferred and it was less than $6,200, then the student could file a tax return to be refunded for those deferred taxes.
Final thoughts
College is expensive. Fortunately, many institutions and organizations offer scholarships to offset the cost of higher education. Because a scholarship has a monetary value, there could be tax implications – depending on the type of award.
