Are Grants, Scholarships, or AmeriCorps Benefits Taxable?
Understand the tax rules for your financial aid. How you use grant, scholarship, or AmeriCorps funds determines whether that money is considered taxable income.
While many forms of educational financial aid are received tax-free, the Internal Revenue Service (IRS) considers certain portions to be taxable income. The taxability of these funds is not determined by the source of the aid, but rather by how the recipient spends the money. If scholarship or grant money is used for specific costs directly related to education, it is not taxed.
Determining Taxable Scholarship and Grant Income
The tax-free status of scholarship and grant funds hinges on their use for “Qualified Education Expenses”. The IRS defines these expenses as costs required for enrollment or attendance at an eligible educational institution. This category primarily includes tuition and fees required to enroll in or attend the college or university. It also covers the cost of books, supplies, and equipment, but only if these items are a mandatory requirement for a specific course.
For an expense to be considered qualified, the educational institution must require it of all students in a particular course of instruction. For example, if a chemistry class requires students to purchase a specific lab coat and safety goggles, the cost of those items would be a qualified expense. Similarly, the cost of a specific software subscription would be qualified if it were a mandatory component for a computer science class.
Conversely, several common student expenses are excluded from the definition of qualified education expenses, and using financial aid for these purposes can create taxable income. These non-qualified expenses include room and board, travel to and from campus, optional equipment that is not required for a course, and student health insurance fees, even if the school requires insurance coverage.
Any portion of a scholarship, fellowship, or grant used to cover these non-qualified costs is considered taxable income. For instance, if a student receives a grant that exceeds their tuition and required fees, and they use the surplus to pay for their apartment rent, that surplus amount must be reported as income.
Calculating the Taxable Portion
To determine the amount of taxable income from educational aid, subtract your total qualified expenses from the total scholarship and grant funds you received for the year. The result, if greater than zero, represents the portion of your aid that is considered taxable income.
Imagine a student receives a $20,000 scholarship. During that same period, they pay $16,000 for tuition and mandatory student activity fees and spend $800 on required textbooks. Their total qualified education expenses would be $16,800. The student would subtract their $16,800 in qualified expenses from the $20,000 scholarship. This calculation reveals that $3,200 of the scholarship money is taxable income that must be reported to the IRS. It is important to keep detailed records of all educational payments.
Special Rules for AmeriCorps Benefits
Benefits received through AmeriCorps service are subject to specific tax rules that distinguish them from traditional scholarships. While the program offers educational awards to help pay for college or repay student loans, these benefits are not treated the same as tax-free grants.
The Segal Education Award is considered taxable income. It is taxable in the year the funds are disbursed to the educational institution or student loan provider, not in the year the award is earned. If a member finishes their service in one year but does not use the award until the following year, the tax liability is deferred until the funds are spent.
Living allowances and stipends paid to members during their service year are also considered taxable income. These payments are intended to cover basic living expenses. Members who receive these payments will get a Form 1099-MISC from the National Service Trust, which reports the total amount of taxable benefits paid.
How to Report Taxable Income
Once you have determined that a portion of your scholarship, grant, or AmeriCorps award is taxable, you must report it on your federal income tax return. If the taxable amount was not reported on another form, such as a W-2 or a 1099-MISC, it is reported on Schedule 1 of Form 1040.
On Schedule 1, you will include the taxable amount on the line for “Other income.” The total from Schedule 1 then flows to the main Form 1040, where it is included in your total income calculation for the year.
Many students receive a Form 1098-T, Tuition Statement, from their educational institution. This form reports the amount of tuition paid and the total scholarships or grants administered by the school. While this document is helpful for calculating your qualified expenses, it does not show the taxable portion of your scholarships, as the responsibility for reporting the correct amount rests with the taxpayer.