Do You Have to Pay Taxes on Scholarships?

Scholarships and grants play a significant role in making education accessible by helping students manage rising costs. While often perceived as “free money,” the taxability of these funds is not always straightforward. Whether a scholarship is subject to taxation depends on how the money is used and the student’s enrollment status. Understanding these tax implications is important for students and their families to accurately report income and avoid unexpected tax obligations.

Determining Scholarship Taxability

The tax treatment of a scholarship depends on its purpose and the recipient’s status. A scholarship or fellowship grant is a sum provided to a student at an educational institution to support their studies or research. For a scholarship to be tax-free, the recipient must be a candidate for a degree at an eligible educational institution, and the funds must be used for “qualified education expenses.” An eligible educational institution maintains a regular faculty and curriculum and has a regularly enrolled body of students.

Qualified education expenses include tuition and fees required for enrollment or attendance at the educational institution. They also encompass fees, books, supplies, and equipment that are required for courses. For example, if a student uses a scholarship to cover tuition and the cost of textbooks mandated for their classes, that portion is generally not taxable.

Conversely, scholarship amounts used for “non-qualified expenses” are taxable income. These non-qualified expenses include room and board, travel, and optional equipment or supplies not required for enrollment or specific courses. For instance, if a student receives a $15,000 scholarship and uses $8,000 for tuition (a qualified expense) and the remaining $7,000 for room and board, the $7,000 used for room and board would be taxable income.

Any portion of a scholarship that represents payment for teaching, research, or other services required as a condition for receiving the scholarship is taxable. This applies even if all degree candidates must perform such services. For example, a graduate student receiving a fellowship that requires them to serve as a teaching assistant would find the portion attributed to these services to be taxable compensation, regardless of how they use the funds.

Reporting Scholarship Income for Tax Purposes

Students must report any taxable scholarship income on their tax return. Educational institutions issue Form 1098-T, Tuition Statement, to students by January 31 each year. This form provides information about tuition paid and scholarships received. However, Form 1098-T does not calculate the taxable amount; it only reports total amounts billed and received.

If a portion of the scholarship is taxable, it must be included in the student’s gross income on their personal income tax return, typically Form 1040. Taxable scholarship and fellowship grants not reported on a Form W-2 are included on Schedule 1 (Form 1040). When using tax preparation software, classify this as taxable scholarship income.

Maintaining accurate records is important for substantiating how scholarship funds were used. Students should keep receipts for qualified education expenses, such as tuition statements, book purchase receipts, and invoices for required supplies. These records are important for an IRS inquiry. If a scholarship involves compensation for services, the educational institution might issue a Form W-2 for the taxable portion, treating it as wages.