If you want to be smart about saving money on college then you definitely want to apply to get scholarships. But are scholarships are straightforward as they seem? Are they really free money? When tax time comes around, you might find yourself asking: “Are Scholarships Taxable Income?”
Most Scholarship Money Is Not Taxable Income
In most cases, scholarships truly are “free money”? In other words, they aren’t considered taxable income. Therefore, the student doesn’t typically have to report the scholarship as income on their taxes. However, there are exceptions to this norm. Therefore, if you want to make sure that you have your taxes done properly, there are some nuances that you should know about.
Usually Scholarships Aren’t Taxable Income If …
According to the Charles Schwab blog, scholarships usually aren’t taxable income provided the following things are true:
- The money goes to an individual who is enrolled to get a degree at an eligible institution (which may be online or on campus)
- Scholarships are used to pay for specific expenses outlined by the scholarship provider. For example, scholarships usually go to pay for tuition, additional tuition-related fees, books, supplies for classes, etc. They may or may not be allowed to pay for room and board. Read the terms of the scholarship carefully.
- It’s a true scholarship and not payment. For example, it’s not work-study payment.
Exceptions When Scholarship Money Might Be Taxable Income
With all of that in mind, some of the exceptions when scholarship money might become taxable income include:
- You don’t use the money to attend classes for a degree program. If you receive a scholarship to attend a program that isn’t a degree program then it’s always considered taxable income. You must pay taxes on that money. In contrast, if you’re taking classes towards an Associates, Bachelors, Masters or PhD then it’s not likely to count as taxable income.
- All or some of the money goes to pay for expenses that aren’t approved for use. For example, if the student uses $2000 of a $10,000 scholarship to pay for food, and that’s not included in what’s allowed, then it’s sometimes considered taxable income.
- The money is a fellowship, work-study, or other payment for services the student provides (such as working as a teaching assistant on campus).
Other Tax Considerations for Students and Their Parents
As a student – or the parent of a college student – you might want to look carefully at your taxes. Asking if scholarships are taxable income is a smart place to start. However, don’t stop there. Make sure that you learn about tax deductions for college students. Moreover, be sure to find out if you qualify for education-related tax credits. There are many ways to reduce college costs; smart tax filing is one of those ways.
- Paying for College: Is It Affordable Without a Scholarship?
- How a Student Can Finance a University Education
- Graduating College Without Debt
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