August 4, 2011

Do you have to pay Taxes on Scholarships?

Are college scholarships considered taxable income?   

If the scholarship money is used for tuition, fees or books then it is not taxed.  However if you use scholarship money for room and board or other incidental living expenses then it should be claimed as taxable income. 

Also for the grad students out there, if you work as a teachers assistant or research assistant then the amount you get paid for the TA or RA work may also be taxable.

Scholarship for tuition, fees or books = tax free

Scholarship for room & board, travel, personal  = taxable

If you have a mix of scholarship money and other funds then you can avoid taxes on the scholarship by using your scholarship to pay for tuition, fees or books and then using your other funds to pay for room and board or other expenses.

Below is copied verbatim from the IRS topic 421 Scholarships and Fellowship Grants

If you receive a scholarship or fellowship grant, all or part of the amounts you receive may be tax–free.
Qualified scholarship and fellowship grants are treated as tax–free amounts if all the following conditions are met:
  1. You are a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regular enrolled body of students in attendance at the place where it carries on its educational activities; and
  2. Amounts you receive as a scholarship or fellowship grant are used for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses of instruction.
You must include in gross income amounts used for incidental expenses, such as room and board, travel, and optional equipment, and generally amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant.
However, you do not need to include in gross income any amounts you receive for services that are required by the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.
If any part of your scholarship or fellowship grant is taxable, you may have to make estimated tax payments. For more information refer to Publication 970 , Tax Benefits for Education

1 comment:

  1. Great post! Just wanted to add that students should receive a 1099 T form from their university/college that shows the amount of scholarship money received at the university along with the total amount the university applied toward tuition and fees. Any overage needs to be reported on the student's tax return.

    My kids were fortunate enough to have very nice scholarship packages, and two of them had scholarship money over and above their tuition and fees. The scholarship money applied to room and board was treated as taxable income. I do recommend comparing the 1099 T against the semester bills - we found the schools didn't always include all the mandatory fees in their totals! We were advised to keep the semester bills along with the 1099 T in the kids' tax records to prove they'd applied scholarship money to the fees.


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