We’d love to say that everyone who puts forth the effort will win a scholarship, but that’s simply not the case. Even though there are more than 1 million programs, the odds of winning a scholarship are about 1 in 8 for those seeking a bachelor’s degree. Earning a full-ride scholarship is even more elusive. Less than 1% of incoming freshmen receive this type of award. If you’re lucky enough to win a scholarship, you may be wondering, “Are scholarships taxable?”
The answer, unfortunately, is not that cut and dry. Although scholarships are billed as “free money” for college, many of them are not 100% free. Depending on the amount you receive and how the funds are used, you may have to claim some or all of your scholarship as unearned income on your tax return. To help you determine if your scholarship is taxable or not, we’ve put together some easy guidelines for you to follow.
Many colleges and universities offer merit-based and need-based scholarships to their students. Merit-based scholarships are awarded based on grades and test scores. Need-based are provided to those who fall below a certain income threshold. Regardless of which type of scholarship you receive, it is generally considered tax-free if all of the following are true:
- You are a degree-seeking student
- You are enrolled part-time or full-time
- The scholarship funds are used for qualified expenses – college tuition, fees, or books
Keep in mind that the books and fees must be required by the college as a condition of enrollment.
Are Scholarships Taxable? In These Cases, Yes.
There are several situations where the “free money” you receive will not be entirely free. If any of these apply to you, you’ll need to pay taxes on your scholarship.
Scholarship Funds Used For “Other” Expenses
The amount of the scholarship cannot exceed your qualified expenses. If the scholarship is earmarked for housing, meals, or other purposes, it would not be tax-free.
Examples of other ineligible expenses include:
- Travel expenses, including parking permits
- Housing (on-campus & off-campus)
- Food (including meal plans)
- Insurance (renter’s, auto, health, etc.)
- Medical costs (prescriptions, copays, lab fees)
Most computers and electronic devices are also ineligible. Certain calculators, however, are covered if required for the course.
Attending an Ineligible School
If you use the scholarship money at a school that is not on the list of eligible institutions, you’ll need to pay taxes on those funds. Most accredited public and private post-secondary schools are eligible. To verify your school meets the requirement, you can use the Federal School Code Search tool on FAFSA.gov.
Enrolled in Professional Courses
Are you enrolled part-time or full-time in a certification course to help you grow personally or professionally? If so, you would be a non-degree seeking student and your scholarship money is taxable.
Working in Exchange for Scholarships
Many schools offer stipends or scholarships to students who provide some type of service. This could include working for a club or organization on campus, or being a teaching or research assistant. Even if it is billed as a scholarship, money earned for work provided is technically earned income and taxable. There are a few exceptions, however, such as programs offered through work colleges, as well as the National Health Services Corps Scholarship Program and the Armed Forces Health Professions Scholarship & Financial Assistance Program.
COVID-19 Relief Scholarships
If you received a scholarship through a COVID-19 relief fund, it is 100% tax-free. Even if you used a portion of the proceeds to cover housing or meals, you are not required to pay taxes on this type of scholarship. It is considered emergency financial aid under the CARES Act and not included in your gross income.
Scholarships & Taxes
In January, your school should send out a Form 1098-T, Tuition Statement. You will need this form when you prepare your tax return. It will include the amount of tuition and fees (box 1), as well as all scholarship proceeds reported to your college (box 5). Keep in mind that box 1 does not include required books and other supplies you may have purchased for classes. You should keep receipts for these items and add them to the total in box 1. Any private scholarships you received personally are also excluded from this form. Be sure these are included in the final scholarship total (box 5 + private awards). If the scholarship amount exceeds your qualified expenses, you may be required to pay taxes on the excess amount.
Who Should File: Parent or Student?
There are a few things to consider when determining which person will claim the scholarship money on their return. In general, a parent will include the 1098-T and scholarship money on their return if all of the following are true:
- The student is under the age of 24 at the end of the tax year (December 31)
- The student is enrolled in an undergraduate program at an accredited institution
- The student attended at least one semester during the tax year
- The student is enrolled at least half-time
- The parent provided more than 50% of the student’s support
- The parent will claim the student as a dependent
- The parent will claim all eligible educational tax credits
A student should file a tax return if they are single and earn more than $12,400, have more than $1,100 in unearned income, or earn more than $400 from self-employment. If a student’s unearned income exceeds $2,200, including scholarships and grants, they may be subject to the kiddie tax rules.
Still Confused? Ask a Tax Professional.
If you’re still not sure if your scholarship money is taxable or not, it’s a good idea to consult with a tax professional. They can help you determine if you are required to file a return or if your parents should claim it on their return instead. At Tax Defense Network, we offer affordable tax preparation services, and our initial consultation is completely free. Call 833-803-4222 to get started today!