It can be a surprise when a scholarship is taxable to the college student. After all, not many of us think of a scholarship as "earnings." However, some students that receive scholarships must include some of the scholarship award as taxable on their personal return. We review the tax rules for scholarships and provide examples to help you determine if some part of the scholarship is taxable.
There are several types of aid that students may receive during their college career. A scholarship is generally an amount paid or allowed to a student at an educational institution for the purpose of study. A fellowship grant is generally an amount paid or allowed to an individual for the purpose of study or research. Other types of grants include need-based grants (such as Pell Grants) and Fulbright grants.
Tax-Free Scholarships and Fellowship Grants
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.
A scholarship or fellowship grant is tax free only to the extent:
- It doesn't exceed your qualified education expenses (discussed later)
- It isn't designated or earmarked for other purposes (such as room and board), and doesn't require (by its terms) that it can't be used for qualified education expenses; and
- It doesn't represent payment for teaching, research, or other services required as a condition for receiving the scholarship.
As a practical matter, very few scholarships prohibit using the scholarship money for qualified education expenses. However, if you receive a scholarship that covers room and board by itself, and you receive scholarships/grants that cover tuition and required fees, you may have some portion of the scholarships considered taxable.
Please also note the scholarship is only taxable if you are a candidate for a degree. If you somehow receive a scholarship for taking a particular course and not as a degree seeking student, this scholarship will be taxable.
Candidate for a degree
You are a candidate for a degree if you:
- Attend a primary or secondary school or are pursuing a degree at a college or university; or
- Attend an educational institution that:
a. Provides a program that is acceptable for full credit toward a bachelor's or higher degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and
b. Is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency.
So, a scholarship for a trade school should qualify if the trade school is a qualifying educational institution.
Eligible educational institution
An eligible educational institution is one whose primary function is the presentation of formal instruction and that normally 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.
Qualified education expenses
For purposes of tax-free scholarships and fellowship grants, these are expenses for:
- Tuition and fees required to enroll at or attend an eligible educational institution; and
- Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.
It's important to note the final sentence noting the items must be required for all students in your course of instruction. So, if the school or your department requires a computer (for example) for enrollment, then it will generally be a qualified educational expense. These items do NOT need to be purchased from the school to qualify.
Expenses that don't qualify
Qualified education expenses do not include the cost of:
- Room and board,
- Clerical help,
- Equipment and other expenses that aren't required for enrollment in or attendance at an eligible educational institution.
There are other expenses that generally will not qualify and include: health fees, athletic fees, parking fees, and transportation costs, or other personal expenses.
Payment for services.
Generally, you can't exclude from your gross income the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services required as a condition for receiving the scholarship. This applies even if all candidates for a degree must perform the services to receive the degree. Please note the exceptions that follow next.
You don't have to treat as payment for services the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services if you receive the amount under:
- The National Health Service Corps Scholarship Program,
- The Armed Forces Health Professions Scholarship and Financial Assistance Program, or
- A comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college (as defined in that section).
Callie attends Texas Tech University as a graduate student. She received a scholarship of $3,500. The scholarship wasn't received under any of the exceptions mentioned above. As a condition for receiving the scholarship, she was required to serve as a part-time teaching assistant. Of the $3,500 scholarship, $1,000 represents payment for teaching. The provider of her scholarship gave her a Form W-2 showing $1,000 as income. Her qualified education expenses were at least $2,500. Assuming that all other conditions are met, the most she can exclude from her gross income is $2,500. The $1,000 she received for teaching must be included in her gross income.
Vicente is a candidate for a degree at a nursing school. He received a scholarship (not under any of the exceptions mentioned above) for his nursing education and training. The terms of his scholarship requires him to perform future services. A substantial penalty applies if he does not comply. The entire amount of his grant is taxable as payment for services in the year it is received.
Erin attends West Texas A&M University as an undergraduate. She received scholarships and grants for the Fall semester totaling $6,500. She used $4,100 for her qualified education expenses and the remainder to pay towards her room and board. Since scholarships are generally taxable if they exceed your qualified education expenses, she will have to report $2,400 as taxable income.
An athletic scholarship is tax free only if and to the extent it meets the requirements discussed earlier. So, it is very likely that a student athlete on a full scholarship or an athlete on partial athletic and academic scholarship could have some amount of the scholarships taxable.
Reporting Taxable Scholarships on the Return
If you receive a taxable scholarship reported on Form W-2 as noted in example 1 above, report on the Wages, Salaries, Tips line as you would any other W-2 income. if you have any taxable scholarships to report as in example 3 above, report on the same Wages, Salaries, Tips line with a notation of "SCH" along with the amount to the left of the Wages, Salaries, Tips line.
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