Do I Have a Tax Free Scholarship?
Do I have to Pay Taxes on My Scholarship or Fellowship? Maybe.
Have you ever heard the expression “There is no such a thing as a free lunch?” When it comes to fellowships, grants and other free money from a college, you may not have a tax free scholarship.
Financial aid that you receive for higher education expenses, even when the college says its free, doesn’t mean that it is. Depending upon how the money is used, you could end up owing the IRS big bucks.
Various types of financial assistance, such as fellowship grants, scholarships, and teaching assistantships, are very important to families. Often times, it may determine if your child will be able to attend the college of his/her choice.
College tuition and other associated expenses have been rising for years. Currently, the average fees and tuition for a full-time student attending a public college in state is 25,290.00. The average for a private college is 50,900.00.
This is why its very important to find out if your free money is really free, and not subject to income tax. In general, a tax free scholarship is one that covers tuition and fees. Any money that you receive for room and board (housing) is not. Unfortunately, the difference isn’t always made clear by the college.
Sometimes, the college itself creates a problem for you. They’ll say, we’re going to give you 10,000.00 and will call it a scholarship. It may or may not be tax-free, depending on how its spent and reported.
IRS conditions to consider one as a tax free scholarship
According to the IRS, students need to satisfy two conditions that will classify their fellowship or scholarship as tax-free money. The first is the educational institution where you are a candidate, must have a curriculum and a regular faculty. It must also have a body of students regularly attending.
The second is any money you receive, covers the cost of books, enrollment fees, supplies and equipment, fees required for courses, and tuition.
Examples of taxable money are room, travel, board, any incidental expenses. In addition, any money that you receive for research, teaching, and any other services conditioned of receiving money is taxable.
You should also be aware that any amount of a tax free scholarship received in excess of your actual cost of tuition, fees, books, equipment, and supplies is taxable.
There are a couple of exceptions for students in the Armed Forces Health Professions and the National Health Service Corps. Their money is tax-free.
The research assistantships and fellowships programs usually combine a tax-free waiver of tuition and a living stipend that is taxable income. How you use those monies and the stated purpose are very important. Keep all receipts and what money was used for them.
A college must issue a W-2 for services paid
If a college pays a student money, say for a part of a teaching assistant-ship, they are required to issue a W-2 to the student and report all taxes withheld.
The school will also send the student a Form 1098-T detailing qualified tuition paid plus the amount of any grants, fellowships, or scholarships received.
Keep all of your receipts so that you can match them with the Form 1098-T.
Now the question arises as who reports the taxable income if any. If the student is a dependent, the parents will report the taxable income on their tax return.
If the fellowship or scholarship is taxable, its considered unearned income. That means if the student is under age 19 or a full-time student under the age of 24, the income is subject to the kiddie tax.
Prior to 2018, the old tax code would have taxed the unearned income in excess of 2,100.00, as subject to the parent’s tax rate by filing Form 8615.
The new tax rates that kicked in for 2018 are not as kind. This unearned income will now be taxed at Trust tax rates. What that means is that income in excess of 12,500.00 is taxed at the rate of 37 percent. If this situation exists for you in 2018, we strongly suggest you contact a qualified tax preparer. The new law is a bit tricky and if you are unsure, you could get burned.
A qualified tax preparer who understands the new tax code will be able to advise you how you should be filing.
Waivers of tuition can be very high, especially if they are for a full school year, and graduate students need to be aware that Congress considered taxing that last fall. Until government spending is curtailed, especially the pork projects, Congress is looking for new avenues to tax.
Factor in the taxation of free money when considering a school
Taxation of free money should be added to the list of factors that need to be considered when a college is selected.
When talking with your financial aid officer, there are a number of questions that should be asked.
- Does the fellowship or scholarship include a payment for a service? As an example, if the college gives you 15,000.00 for conducting research at the school, request a breakdown of the money. What portion is the scholarship? (This amount may be tax-free) What portion is for payment for doing research? ( That amount is probably taxable income).
- Are there any tax documents that will be sent to me? If any part of the money is considered wages, you should be getting a W-2).
- You need to calculate the actual cost after taxes and financial aid. Once you have that number, it should be factored in to get the net cost, and you will be able to compare the offers you received from all of the schools.
Just make sure that you factor in the impact of taxes on any fellowship or a tax free scholarship that may be taxable.
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11 responses to “Do I Have a Tax Free Scholarship?”
Please join the discussion below...we'd love to hear from you.
Gust Lenglet – Platinum Author
Wow! I had no idea that sometimes a scholarship might be taxable. I got one at my college for football and I guess I better ask someone a few questions.
I’m glad you read the article Max and that it caused you to find out for sure. Your type of scholarship is probably tax free, but it pays to be certain.
I got a scholarship for football too in my school. Max, were you able to find out anything about yours?
Thanks for your inquiry Allan. I’ll let Max respond to your question at this time.
Yeah, I met with my counselor and she did some checking for me. My scholarship covers only tuition and books, so she said it would be non taxable. She did make a comment though, that if it had covered like room & board, it would have been a different story. Just to be positive, I’d meet with a counselor & get the facts.
I’ll be getting a scholarship this fall when I enter my first year of college. I’ve been told that it will cover tuition and books only so I am assuming that it will not be taxable???
Thanks for your question Tanisha. If, as you say, the scholarship covers only tuition and books, then it will be tax free. Just be sure that it does cover only those two items.
I’m sure glad that I read this article. I’ve been accepted at a New England college this fall and I will also be receiving a scholarship. The first thing I plan to do is meet with someone at the school to be really sure what the scholarship covers. I don’t want to be receiving some tax form next tax season saying that I have to report more income. Thanks for the great reminder.
Thanks for your kind words Cynthia. I’m glad to see that we were able to be of help.
I just finished my second year of college and had a scholarship that is not taxable. Those people in congress who make these laws should realize that the more a scholarship pays for, the less the student has to borrow. And the less that is borrowed makes it easier to pay back. If it’s easier to pay back, then that’s one more loan that doesn’t go in default & get charged off. Am I the only one that sees this?
Anna, you may be onto something there. It appears that a domino effect may be in play here. It does make sense and maybe a study needs to be done to see how taxable scholarships affected borrowings. Better yet, hopefully one of our politicians will see your comment in a search, and a bell in his head may ring.