How Do I Know if My Scholarship Is Taxable?

Scholarships help cover education costs, but many students and parents are unsure whether they are taxable. While some scholarships are tax-free, others require reporting as income. Understanding these rules can prevent unexpected tax bills and ensure compliance with IRS regulations.

The key factor is how the scholarship funds are used. Some expenses qualify for tax-free treatment, while others do not. Knowing these distinctions helps determine if any portion must be included in taxable income.

How Scholarships Are Treated for Tax Purposes

The tax treatment of scholarships depends on their use and whether they meet IRS criteria. Under the Internal Revenue Code, scholarship amounts used for specific educational purposes can be excluded from taxable income. However, any portion that does not meet these conditions is taxable.

To be tax-free, the recipient must be a degree-seeking student at an eligible institution—one with a regular faculty, curriculum, and enrolled student body. Scholarships awarded for non-degree programs, such as professional certifications, are generally taxable unless an exception applies.

Scholarships requiring recipients to perform services—such as teaching or research assistantships—are taxable income, even if used for tuition or other educational costs. Exceptions exist for certain federally funded programs, like the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship Program, which remain tax-free despite service obligations.

Determining Qualified Educational Expenses

Scholarship funds are tax-free only when used for qualified educational expenses as defined by the IRS. Tuition and mandatory fees required for enrollment at an eligible institution qualify. Course-related expenses, such as textbooks, lab supplies, and equipment, also qualify if explicitly required by the institution or instructor.

Room and board, even if on-campus living is required, do not qualify as tax-exempt educational costs. Other non-qualified expenses include transportation, travel, and personal items like laptops or software unless explicitly required for coursework.

Some costs fall into a gray area. For example, technology fees or specialized equipment may qualify if mandatory for all students in a particular program. However, optional expenses, such as fraternity dues or extracurricular activity fees, do not qualify.

Figuring Out the Taxable Portion

If a scholarship exceeds qualified educational expenses, the excess amount is taxable. For example, if a student receives a $15,000 scholarship but has only $12,000 in qualified expenses, the remaining $3,000 is taxable income.

Students who receive scholarships covering living expenses, stipends, or discretionary funds may also owe taxes on those amounts. If a scholarship is disbursed in multiple installments, students should track how much is used for qualified expenses each term to avoid underreporting taxable amounts. Keeping records, including tuition invoices and receipts, helps substantiate how funds were applied if questioned by the IRS.

Reporting the Scholarship Amount

When a scholarship is taxable, it must be included in the recipient’s gross income and reported on their tax return. If the scholarship is tied to work, such as a teaching or research assistantship, the school will issue a Form W-2, listing the taxable amount as wages. This means it is subject to federal income tax withholding and may also be liable for Social Security and Medicare taxes.

For scholarships not reported on a W-2, students must determine the taxable portion themselves and report it on their tax filing. This amount is entered on Form 1040 as “Other Income.” Unlike wages, no automatic withholding occurs, so recipients may need to make estimated tax payments to avoid penalties. Estimated payments are required if total tax liability exceeds $1,000 after subtracting withholding and credits. Failure to plan ahead could result in unexpected tax bills.