Are Scholarships Taxable?
Scholarships are one of the best ways to pay for college. After all, scholarships are essentially free money that does not need to be repaid. One of the things that students sometimes do not think about is the impact of scholarships on taxes and whether scholarships are taxable.
It is certainly important to know how both private scholarships and college-specific merit scholarships can impact your federal and state taxes at the end of the year.
Jump ahead to:
- When are scholarships not taxable?
- When are scholarships taxable?
- How do I report scholarships on my taxes if I need to?
- Bottom line for students
It is important to know how scholarships can impact your taxes at the end of the year. Generally, scholarships are not considered taxable income for most students, but exceptions do exist. Keep on reading to learn more about what winning a scholarship may mean for your taxes.
When are scholarships not taxable?
Let’s start with the good news: if you are using your scholarship on an accredited institution of education, then they are not taxable. According to the Internal Revenue Service (IRS), scholarship are not taxable under two conditions:
- You’re a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities,
- The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses at the educational institution.
Simply, this means that as long as your scholarship is used for educational expenses (tuition, fees, books, or other supplies) at an educational institution, you are fine. This will represent the vast majority of students.
When are scholarships taxable?
According to the IRS, scholarships are taxable if they are used for other non-educational purposes (ie: you can’t use your scholarship dollars to go on vacation or buy new clothes). This should be pretty obvious for most students.
Interestingly, scholarships can also be taxable if they are used for expenses such as room and board (or housing and food), travel to campus, and equipment that is deemed “optional.” Additionally, stipends earned through teaching, research, or fellowships are considered taxable income (though this will mainly apply to graduate students).
The easy way to deal with this is to use your scholarships for educational purposes, but next we will discuss how you can report your scholarships on your tax forms.
How do I report scholarships on my taxes if I need to?
The IRS gives students the following guidelines if they do have to pay taxes on their scholarship earnings:
Form 1040 Guidelines
“If filing Form 1040 (PDF) or Form 1040-SR (PDF), 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.“
Form 1040-NR Guidelines
Questions about tax forms?
If you have any further questions, we suggest talking to your accountant or financial adviser. Everyone’s situation is different, and a financial professional is going to offer the best information for your situation.
Bottom line for students
The vast majority of students will not need to worry about reporting scholarships as taxable income. In fact, since many scholarships award the money directly to the college in question, there is even less room for concern.
However, if you are one of the exceptions to this, you will need to file the appropriate tax forms and probably talk to a tax professional.