Do You Pay Taxes on College Scholarships?

Scholarships and grants are a source of funding for higher education, helping students manage the rising costs of college. A common point of confusion is their tax treatment, and many recipients wonder if this aid constitutes taxable income to the Internal Revenue Service (IRS). The answer depends on how the funds are used and the student’s specific circumstances.

Determining Tax-Free Status

For a scholarship or grant to be tax-free, a recipient must meet two primary conditions set by the IRS. First, the student must be a candidate for a degree at an eligible educational institution. This is an institution that maintains a regular faculty and curriculum with an enrolled student body, which covers most accredited colleges, universities, and vocational schools.

The second condition is that the funds must be used for qualified education expenses. These include tuition and fees required for enrollment or attendance. They also encompass costs for books, supplies, and equipment that are required for courses.

For example, if a graphic design course requires students to purchase a specific software subscription, the cost is a qualified expense. Similarly, the cost of a lab coat for a chemistry class or specific textbooks listed on a course syllabus would also qualify. The item must be a requirement, not merely a helpful or suggested resource.

The student is responsible for tracking these qualified expenses. Keeping detailed records, including receipts for textbooks and required supplies, is a good practice. This documentation provides proof that scholarship funds were used for tax-free purposes.

Identifying Taxable Scholarship Income

Any portion of a scholarship or grant used for non-qualified expenses is considered taxable income. These are costs not directly required for enrollment or coursework. Common examples include room and board, travel expenses, and optional equipment.

Taxable income also occurs when the total scholarships and grants received in a year exceed the total qualified education expenses for that year. For instance, if a student receives $25,000 in scholarships but their qualified expenses are only $20,000, the remaining $5,000 is taxable income. This excess amount must be reported on the student’s tax return.

Another category of taxable funds involves payments for services. If a student receives money designated as payment for teaching, research, or other services, that amount is taxable. This holds true even if performing these services is a condition for receiving the award.

For example, a graduate student who receives a $10,000 grant requiring them to work as a teaching assistant would have that amount treated as taxable income. The funds are considered compensation for work, not a tax-free scholarship for education. It is important to read the terms of any award to understand if it is tied to a service requirement.

How to Report Taxable Income

Once a student determines they have taxable scholarship income, they must report it to the IRS on their annual tax return, Form 1040. The student must calculate the amount of their scholarship funds used for non-qualified expenses or that exceeded their total qualified costs. This taxable portion is then included in their total income for the year.

The taxable amount should be reported on the “Wages, salaries, tips” line of the tax return. To specify the source, students should write “SCH” and the taxable amount in the space to the left of that line on Form 1040. This notation clarifies to the IRS that the income is from a scholarship, especially if a Form W-2 was not issued.

Many students will receive a Form 1098-T, Tuition Statement, from their educational institution. This form reports the amount of tuition billed or payments received, along with scholarships and grants the school administered. While Form 1098-T is a helpful tool, its figures may not represent the final amounts a student can claim.

This is because the form does not include costs for books and supplies purchased elsewhere. The ultimate responsibility for tracking all qualified expenses and accurately calculating the taxable portion of any scholarship rests with the student.

If the taxable scholarship income is substantial and no taxes were withheld, the student may need to make estimated tax payments throughout the year to avoid a penalty. This involves calculating the expected tax liability on the scholarship income and paying it in quarterly installments. IRS Publication 970, Tax Benefits for Education, can provide further detailed guidance.