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Are Scholarships Taxable?

Scholarships are one of the best ways to pay for college. After all, scholarships are essentially free money that never needs to be repaid. But you might be wondering, “Do I have to pay taxes on my scholarships?” Indeed, 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. Generally, scholarships are not taxable income for most students, but exceptions do exist. Keep on reading to learn more about what winning scholarships may mean for your taxes.

Jump ahead to:

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), scholarships are not taxable under two conditions:

  1. 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,
  2. 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), you are fine. This scenario represents the vast majority of students.

When are scholarships taxable?

According to the IRS, scholarships are taxable if used for other non-educational purposes (i.e.: 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).

Also, scholarships are taxable if larger than your college’s Cost of Attendance. It’s really hard to get a scholarship larger than the COA, so most of us won’t have to worry about paying taxes on our scholarships. If, however, you are the student who kicks a field goal from mid-field at the half-time of the bowl game for a $500,000 scholarship, more than likely, you will be paying taxes on that scholarship.

Next, we will discuss how you can report your scholarships on your tax forms if you need to.

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

Form 1040

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

Form 1040-NR

“If filing Form 1040-NR (PDF) or Form 1040-NR-EZ (PDF), report the taxable amount on the “Scholarship and fellowship grants” line.

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.

Key Takeaways

Key Takeaways

  • 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
  • If you use your scholarship money for expenses not deemed educational by the government, such as “optional” equipment, room and board, or travel, you may have to pay taxes on those funds
  • If you have any reason to believe that you fall into a taxable category, make sure to talk to a tax professional to avoid over or under-reporting
Key Takeaways

Keep reading:

Frequently asked questions about whether scholarships are taxable

Scholarships received by a dependent child are generally not counted as taxable income for the parent unless the scholarship exceeds the child’s qualified educational expenses.

Are scholarships for online learning programs treated differently for tax purposes?

Scholarships for online programs are generally treated the same as scholarships for traditional in-person education if they meet the IRS criteria.

What happens if I use scholarship funds for non-qualified expenses?

If you use scholarship funds for non-qualified expenses such as  vacations or a car, that portion of the scholarship may become taxable income.