Do I Have to Claim Scholarships on My Taxes?

Scholarships provide financial assistance for educational pursuits, helping students cover the increasing costs of higher education. While these funds can significantly reduce the financial burden, their tax treatment is not always straightforward. Whether scholarship money must be reported as income depends on how the funds are used and if the recipient is a degree-seeking student. Understanding these nuances is important for tax compliance.

Understanding Scholarship Taxability

A scholarship or fellowship grant is generally tax-free if you are a degree candidate at an eligible educational institution and the funds are used for qualified education expenses. An eligible educational institution maintains a regular faculty, curriculum, and enrolled students. Qualified education expenses include tuition, fees, books, supplies, and equipment specifically required for courses. Funds used for these direct academic costs are typically not considered taxable income.

However, any portion of a scholarship used for expenses beyond qualified costs is taxable income. Non-qualified expenses include room and board, travel, research, clerical help, and optional fees. For instance, if a scholarship covers tuition and also provides funds for living expenses, the portion allocated to living expenses would be taxable. It is the student’s responsibility to determine the taxable amount based on how the funds were utilized.

Reporting Taxable Scholarships

If your scholarship is taxable, report the amount on your federal income tax return. This income is reported on Form 1040, Schedule 1, as “other income.” The amount is usually entered on line 8r, labeled “Scholarship and fellowship grants not reported on Form W-2.” This ensures the income is properly accounted for.

Educational institutions issue Form 1098-T, the Tuition Statement, providing information on tuition paid and scholarships received. While Form 1098-T reports total scholarships in Box 5, this form is primarily informational and does not definitively state the taxable amount. It is your responsibility to accurately calculate and report any taxable scholarship portion. You must determine and report taxable income based on your own records, even if you don’t receive a Form 1098-T or if it’s inaccurate.

Record Keeping and Specific Situations

Maintaining good records is important for scholarship recipients. Keep documentation of scholarship award letters, tuition bills, receipts for qualified education expenses, and related correspondence. These records substantiate the non-taxable portion of your scholarship, especially if reviewed by the Internal Revenue Service. They demonstrate how funds were applied to qualified educational costs.

Some scholarships or grants may require recipients to perform services. The portion representing payment for these services is taxable wages. This income is reported on a Form W-2 and is subject to different tax rules than traditional scholarships. This distinction changes how the income is categorized and taxed.

Tax-free scholarships affect eligibility for education tax credits, such as the American Opportunity Tax Credit or Lifetime Learning Credit. When calculating these credits, reduce your qualified education expenses by any tax-free scholarship amounts. This prevents a double tax benefit, as expenses cannot be used to both exclude scholarship income and claim a credit.