In most cases, college scholarships are not taxable. But there are a few instances when you might owe taxes on scholarship money.
Read on to learn more about whether scholarships are taxable and if so, how to prepare for this unexpected expense.
Are scholarships taxable? It depends
So, are scholarships taxable income? The answer lies in what type of scholarship you have. Below are the tax implications for college scholarships, as explained by the IRS. Click on the appropriate scholarship in this chart to see whether you might be on the hook for tax money:
According to the IRS, an “eligible educational institution” is defined as follows:
- The main purpose is formal instruction.
- It regularly maintains a faculty and curriculum.
- It normally has an enrolled student base where it performs instruction.
Additionally, you must be a candidate for a degree at such an institution. That means your school has to offer the credits necessary to get that degree. That said, schools offering a training program for a “recognized occupation” can also qualify for tax-free scholarships, so it’s best to check with the school in question if you think you fall into this category.
If your school fits this description, then your tuition scholarship isn’t taxable. But the funds need to meet a few other criteria.
If you use your scholarship for expenses other than tuition, such as room and board, it might be taxable. The same goes for payment for services you agree to do for the scholarship, such as teaching or conducting research.
If you’re thinking of using scholarship money to take classes for leisure, you might want to reconsider if you don’t want to pay taxes on your college scholarship.
According to the IRS, “a scholarship or fellowship grant is tax-free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution.”
If not, you’ll have to include your scholarship money on your taxes as income.
Room and board can be a pricey part of the college experience, so it might come as a surprise that scholarship or grant funds used for that purpose could be taxable. The same goes for any funds that exceed the cost of your tuition.
Scholarships and grants can have parts that aren’t taxable and parts that are. That’s why you need to know about “qualified education expenses.”
Qualified education expenses include the following:
- Course-related mandatory expenses, such as books and supplies
Expenses that aren’t qualified seem to fall under whatever happens outside the classroom, including room and board and travel. Scholarship funds used for those expenses would be taxable.
There are times when a scholarship or grant comes with a stipulation requiring you to work for it – by teaching or conducting research, for example.
In those cases, you’ll most likely have to treat payment for those services as taxable income.
But there are exceptions to this rule.
If your services are being paid for by the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program, then you’re not required to treat that payment as taxable income.
If you’re a veteran, the IRS doesn’t consider funds you get for education or training to be taxable income. That said, the IRS does caution you to be aware of the tax implications of any other grants or scholarships you receive.
What about the other ways you might receive funds for your education? Consider the following:
- Athletic scholarships
- Fulbright scholarships
- Need-based education grants
According to the IRS, all of the above “are tax-free to the extent used for qualified education expenses during the period for which a grant is awarded.”
If you just found out that your college scholarship could be taxable, you might be feeling a bit frustrated right now. After all, that money is supposed to help you pay for school, not cost you more money.
But even if you owe some taxes, applying for scholarships is likely still worth it. Any tax bill would probably cost less than the amount of interest you’d pay if you borrowed a lot in student loans.
What’s more, you can sign up for a payment plan on your taxes if you need to – and the interest rates on an IRS payment plan likely won’t be nearly as high as student loan interest rates can be.
In the end, if you take on as little student loan debt as possible, you’ll get an easier start after college graduation.
Rebecca Safier contributed to this article.
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