Do You Have to Report Scholarships on Taxes?

Scholarships can be significant financial aid for students pursuing higher education. While often perceived as “free money,” the taxability of scholarship funds depends on how the money is used and the recipient’s enrollment status. Understanding these distinctions helps students accurately report their income and fulfill tax obligations.

Understanding Taxable Scholarship Funds

Scholarship money becomes taxable income if used for expenses beyond those considered “qualified education expenses” by the IRS. This includes amounts spent on incidental expenses such as room and board, travel, and optional equipment. For instance, if a scholarship covers tuition, but a portion is allocated for living expenses, that portion is taxable.

Scholarships received in exchange for services, such as teaching, research, or other work required as a condition for receiving the scholarship, are taxable income. This applies unless the services are required by specific programs like the National Health Service Corps Scholarship Program or the F. Edward Hébert Armed Forces Health Professions Scholarship and Financial Assistance Program. For these programs, while a monthly living stipend might be taxable, tuition and other educational costs are often tax-free.

Only the portion of the scholarship used for non-qualified expenses or received in exchange for services is taxable. For example, if a $15,000 scholarship is awarded and $8,000 covers tuition (a qualified expense), but $7,000 is used for room and board, that $7,000 would be considered taxable income. This distinction helps determine the amount included in gross income.

Understanding Non-Taxable Scholarship Funds

Scholarship funds are not taxable income if specific conditions are met. The recipient must be a candidate for a degree at an eligible educational institution, defined as one maintaining a regular faculty, curriculum, and regularly enrolled students. This includes most colleges, universities, and certain vocational schools.

The funds must be used for “qualified education expenses.” These expenses include tuition and fees required for enrollment or attendance at the educational institution. The cost of books, supplies, and equipment required for courses are also qualified expenses.

These expenses must be required for all students in a particular course or program. If a scholarship provides funds that do not exceed these qualified education expenses and does not represent payment for services, that portion of the scholarship is tax-free. This allows students to receive financial aid without incurring a tax liability on the portion used directly for their education.

How to Report Scholarship Income

There is no specific IRS form for reporting scholarship income. If a portion of scholarship funds is taxable, it must be included in gross income on Form 1040. Taxable scholarship amounts not reported on a Form W-2 are entered on Schedule 1 (Form 1040), Additional Income and Adjustments to Income, on the “other income” line. The total from Schedule 1 then flows to the main Form 1040.

While an eligible educational institution may issue Form 1098-T, Tuition Statement, this form primarily reports tuition billed or payments received and the total of scholarships or grants processed by the institution. It does not necessarily reflect the taxable portion of a scholarship, as the student is responsible for determining how their scholarship funds were used and calculating the taxable amount. Students should maintain detailed records of all scholarship funds received and all education expenses paid.

If a portion of scholarship income is taxable and no taxes are withheld, students might need to make estimated tax payments throughout the year to avoid penalties. This is similar to how self-employed individuals manage their tax obligations. Students should consult IRS Publication 505, Tax Withholding and Estimated Tax, for guidance on whether estimated tax payments are required based on their individual circumstances.