Do You Have to Claim Scholarships on Your Taxes?

Scholarships can significantly reduce the financial burden of higher education, but their tax treatment is not always straightforward. Whether scholarship money is taxable depends on how the funds are used and the student’s enrollment status. Understanding these distinctions is important for students and their families when preparing tax returns.

Understanding Tax-Free Scholarships

Scholarship funds are generally considered tax-free if specific conditions are met. The student must be a candidate for a degree at an eligible educational institution. An eligible institution typically has a regular faculty and curriculum and a regularly enrolled student body.

For the scholarship to be tax-free, the funds must be used solely for qualified education expenses. These expenses include tuition and fees required for enrollment or attendance. They also encompass fees, books, supplies, and equipment that are required for courses of instruction.

Examples of qualified education expenses include the cost of textbooks specified for a particular class or a lab fee that all students in a science course must pay. Funds designated for these purposes are not subject to federal income tax.

Identifying Taxable Scholarship Income

Scholarship amounts used for expenses beyond qualified education expenses are generally treated as taxable income. This includes funds spent on incidental costs such as room and board, travel expenses, and optional fees. Items like personal computers or general living expenses, unless specifically required for a course, also fall into this taxable category.

Scholarships received as payment for services are also typically taxable, even if the student uses the money for qualified education expenses. This applies if the scholarship is conditioned on the student performing teaching, research, or other work. For example, a graduate student receiving a scholarship in exchange for serving as a teaching assistant would find that portion of their scholarship taxable.

However, for most students, if the scholarship requires work, the value of that work is considered income. It is important to distinguish between a scholarship that simply supports a student’s studies and one that compensates them for services rendered.

Reporting Scholarship Income

Students typically do not receive a Form W-2 for scholarship income unless it represents payment for services as an employee. Educational institutions often issue Form 1098-T, Tuition Statement, which provides information about tuition paid and scholarships received. Box 5 of Form 1098-T reports the total amount of scholarships and grants disbursed.

Form 1098-T is an informational document and does not definitively determine the taxable portion of a scholarship. The student is responsible for calculating the taxable amount based on how the funds were used. Any scholarship income determined to be taxable, such as funds used for non-qualified expenses or received as payment for services, must be reported on the student’s federal income tax return.

Taxable scholarship income is generally reported as “other income” on Schedule 1 (Form 1040) and included in the total income reported on Form 1040. Maintaining thorough records, including documentation of scholarship amounts and receipts for all educational expenses, is important for accurately determining the taxable portion and supporting tax return entries.