Do You Pay Taxes on College Scholarships?

College scholarships provide financial assistance for higher education. Understanding their tax implications is important for students and their families. The Internal Revenue Service (IRS) has specific conditions that determine whether scholarship money is taxable income. Many scholarships are tax-free, but certain uses or conditions can make them partially or fully taxable. Knowing these distinctions is necessary for accurate tax reporting.

Understanding Tax-Free Scholarship Funds

Scholarship funds are tax-free if they meet IRS criteria. A primary condition is that the recipient must be a candidate for a degree at an eligible educational institution. This includes colleges, universities, vocational schools, or other postsecondary institutions eligible for federal student aid programs.

The funds must be used for qualified education expenses. These expenses include tuition and fees required for enrollment or attendance. They also encompass fees, books, supplies, and equipment necessary for courses at the educational institution. For instance, the cost of textbooks for a specific class or a required lab fee would qualify.

Books, supplies, and equipment are qualified expenses if they are required for the course of study. This helps ensure the scholarship directly supports the academic pursuit.

Situations Where Scholarships Are Taxable

Scholarship funds become taxable income when used for expenses beyond IRS-defined qualified education expenses. This includes incidental expenses such as room and board, travel, or optional equipment. For example, money used for living expenses in a dormitory or apartment, or for transportation, is taxable. Funds for optional fees, like recreational activities, also fall into the taxable category.

Scholarships requiring the recipient to perform services as a condition for receiving funds are taxable. This applies even if the services, such as teaching or conducting research, are a degree requirement. The value of these services is considered compensation and must be included in the recipient’s gross income. For example, a graduate student receiving a scholarship for teaching undergraduate courses would find that portion taxable.

If the total scholarship amount received exceeds qualified education expenses, the excess portion is taxable income. This excess amount, which might be used for personal living costs, is taxable. The student is responsible for accurately determining this taxable portion.

Reporting Scholarship Income

When a portion of scholarship funds is taxable, it must be reported on the recipient’s federal income tax return. Taxable scholarship amounts are reported as “other income” on Schedule 1 (Form 1040), Line 8r. This amount then flows to the main Form 1040.

Students may receive Form 1098-T, Tuition Statement, from their educational institution. This form reports amounts related to tuition and related expenses, as well as scholarships and grants processed by the institution. However, Form 1098-T does not always reflect the exact taxable amount of a scholarship, as it primarily shows payments and scholarships processed by the school. The student is responsible for accurately calculating the taxable portion based on how the funds were used.

A student may need to file a tax return if their taxable scholarship income, combined with any other income, exceeds the standard deduction for dependents. Maintaining thorough records is important to support the amounts reported. This includes keeping documentation of scholarship awards and receipts for all qualified education expenses paid. These records can help substantiate the tax-free portion of the scholarship if the IRS has questions.