Are Scholarships or Grants Taxable Income?

Are Scholarships or Grants Taxable Income?Pin

Are Scholarships or Grants Taxable Income?

I don’t need to remind you how expensive a college education has become over the past few years. As a result, more and more students have had to rely on scholarships or grants to help lower these very high costs for higher education.

The son of one of my friends attended Carnegie Mellon University in Pennsylvania a couple of years ago, and before scholarships, the cost for four years with a bachelors degree was $297,964. That included tuition, fees, and room and board, but still a hefty price for an education.

We’ll discuss some tax tips to give you a better understanding as to how scholarships or grants can affect your taxes. If you or a dependent received scholarships or grants towards your college education, read carefully. You may wonder, are scholarships or grants taxable income? Short answer…they may be.

Non-taxable scholarships or grants

If there is any good news on this topic, it’s this. Any scholarships and grants that are used entirely, for what the IRS calls, “qualified education expenses”, are tax free. The items that would qualify are tuition, school fees, supplies and books required by the school for the courses you’re taking.

The IRS goes on a bit further, and adds this qualification…”you must be a candidate for a degree at an educational institution that maintains a regular faculty and a curriculum, and normally has an enrolled body of students in attendance at the place where it carries on its educational activities.”

Any scholarship or fellowship you may have received as a part of the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program, is tax free. If you’re a part of a qualifying work learning service program, you’re included too. If you’re searching for a website for scholarships and grants, start with this website .

What scholarships and grants are taxable then?

Are scholarships or grants taxable incomePinAny money that you received from scholarships that is left over after paying qualifying education expenses, is taxable income, and must be reported on your tax return. If you use any scholarship money to pay for room and board or utilities, it becomes taxable too. That includes school travel or other supplies not required by the school as well.

How do scholarships and grants affect taxes?

Any fellowships, grants, and assistance programs received while you’re enrolled in school, that have a requirement for you to provide some kind of service, could be taxable. That could include scholarships and grants for teachers.

As an example, you were awarded a scholarship for $12,000 and they designated $5,000 as compensation for research or teaching while you were in school. The $5,000 would be taxable income, and the remaining $7,000 would be tax free as long as it was used entirely for qualified education expenses.

In the above example, the provider of the scholarship would send you a Form W-2 letting you know that $5,000 is to be reported as taxable income. If you don’t receive the W-2, you need to contact the scholarship provider to find out why.

As a final reminder, keep in mind that “double dipping” is a big no-no. What that means is if you used tax free money from a scholarship to pay for qualified education expenses, you’re not allowed to claim any of the education credits. Those two credits are the American Opportunity Tax Credit and the Lifetime Learning Credit.

No need to worry about those special tax rules though, when you use the HBS Financial Group online tax filing program, we’ve got you covered. Answer a few simple interview questions, and based on your answers, we’ll get you all deductions and other credits you may be eligible for.

 

Gust Lenglet

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