Is Giving a Scholarship Tax Deductible?

A scholarship can be a significant financial aid for students, and for donors, the question of its tax deductibility often arises. Whether giving a scholarship is tax-deductible depends primarily on who receives the funds and the nature of the gift. Direct financial assistance from an individual to another, even for education, generally does not qualify as a tax-deductible charitable contribution. Tax laws encourage contributions to established public charitable organizations.

However, contributions to qualified educational organizations that use funds for scholarships can be tax-deductible. The intent to support education is recognized, but must align with Internal Revenue Service (IRS) guidelines regarding the recipient entity.

Contributions to Qualified Educational Organizations

For a scholarship contribution to be tax-deductible, it must be made to a qualified educational organization. These entities are recognized by the Internal Revenue Service (IRS) as public charities under Internal Revenue Code (IRC) Section 501(c)(3). Examples include universities, colleges, and scholarship funds operated by 501(c)(3) organizations with a regular faculty, curriculum, and enrolled students.

Donors can contribute various types of assets to these qualified organizations. Cash contributions are common, but property and appreciated assets, such as stocks or mutual funds, can also be donated. Donating appreciated property held for over one year allows donors to deduct the fair market value and may avoid capital gains tax. This offers a dual tax benefit, reducing income tax liability and potential capital gains taxes.

Charitable contributions are subject to adjusted gross income (AGI) limitations, varying by contribution type and recipient. For cash contributions to public charities, individuals can deduct up to 60% of their AGI. Appreciated property contributions to public charities are limited to 30% of AGI. Excess contributions can be carried over and deducted in the next five tax years.

A charitable contribution is deductible only if the donor receives no personal benefit in return. If goods or services (e.g., event tickets, merchandise) are received, the deductible amount must be reduced by their fair market value. The contribution must be a charitable gift, not a payment for goods or services. This distinguishes genuine charitable intent from a purchase.

Direct Payments to Individuals

Direct scholarship payments from an individual or entity to another individual are not tax-deductible. Even if intended for education, tax law requires contributions to a qualified charitable organization for deductibility. This distinction ensures IRS regulation and tracking of charitable giving through recognized non-profit entities, promoting accountability.

Many individuals mistakenly believe directly funding a student’s education, even for a family member, results in a tax deduction. These payments are personal gifts and do not meet charitable deduction criteria. The tax code outlines eligible recipients for tax-deductible donations, including IRC Section 501(c)(3) organizations. Direct payments to individuals fall outside these categories.

While scholarship recipients may or may not pay tax on the income, the donor receives no deduction for direct payments. For a student’s scholarship to be tax-free, it must be for a degree candidate and used for qualified educational expenses like tuition and fees. The recipient’s tax treatment does not confer deductibility upon the donor.

Claiming the Deduction

Claiming a tax deduction for contributions to qualified educational organizations requires careful record-keeping and proper tax return reporting. To substantiate cash contributions, maintain bank records (e.g., canceled checks, statements) or a written communication from the organization. These records must show the organization’s name, contribution amount, and date.

For contributions of $250 or more (cash or non-cash), obtain a contemporaneous written acknowledgment from the qualified organization. This acknowledgment must include the organization’s name, cash amount, and non-cash description. It must also state if goods or services were provided in exchange, with a description and good faith value estimate. This acknowledgment must be received by your tax return filing date or its due date, including extensions.

Charitable contributions are reported on Schedule A (Form 1040), Itemized Deductions. You can only claim a deduction if you itemize, meaning your total itemized deductions exceed the standard deduction. For non-cash contributions over $500, complete IRS Form 8283, Noncash Charitable Contributions, and attach it. If non-cash property value exceeds $5,000, a qualified appraisal may be required, and Section B of Form 8283 must be completed.

Accurate record-keeping is important for audits. The IRS may request proof of contributions up to three years after filing. Ensuring you have all necessary documentation, including bank records and written acknowledgments, validates claimed deductions. This supports your tax position and demonstrates IRS compliance.