Are College Scholarships Taxable?

Are college scholarships taxable? Several students and their parents are unfamiliar with the terms of scholarships and the uncertainty leads to incorrect reports of your annual tax return.In this article, we will know are college grants and scholarships taxable income? And more about it.

Updated by Shreya Gupta on 23rd September 2020

If your scholarship money is a part of your income then they are taxable. It’s essential to know that the award that you have granted is taxable or not. Certain requirements and outlined expenses are set up to make sure the scholarships or awards are tax-free.

In this article, we will know are college grants and scholarships taxable income? And more about it.


What do you understand by Scholarship?

College Scholarships are the financial support given to a student based on academic excellence in various fields such as education, sports, cultural events, or other criteria and not based on the financial need. 

The basic idea of the scholarship is that it is the money given to you by somebody for paying the tuition and fees in college or university.  

Any amount received by a person as a scholarship is considered as income in his hands. The amount though deemed as income of the assessee shall be exempt in the hands of the receiver. 

If you're not sure if your award is taxable, ask the organization that sponsored the award. They may have information from the IRS regarding your award's tax status.


Are college scholarships taxable?

Scholarship money is generally tax-free provided you are a candidate for a degree at an eligible institution and use the money to pay for qualified expenses.

Although if the money form scholarship or grants is given to you as an income then it’s taxable. 

In case you are a full-time or even part-time applicant for a degree then your scholarship could be tax-free. 

There are certain criteria that make your scholarships tax-free i.e when your grants cover tuition and fees to enroll in an educational institution.

Well of course, when it comes to taxes, there's rarely a simple yes or no answer.

If your scholarship meets these criteria then the award is tax-free.


Tax-free Scholarships

For a scholarship or the award to be tax-free, it must meet certain requirements. As per IRS has mentioned there are certain minimum conditions that scholarships and awards should qualify. Let’s look ahead to these conditions: 

  • The student should be an eligible degree candidate in an educational institute. It usually implies an accredited institution with a regular faculty and curriculum and a regularly enrolled body of students.

  • The money does not represent wages for teaching or other work.

  • The award or scholarship money is used for outlined expenses only. The mentioned expenses cover tuition fees. It does not cover student’s books, rooms, and board, traveling, and other supplies. 

  • The instructions come pretty clear as they can be. The scholarship will be considered completely tax-free as long as it’s utilized beyond qualified expenses. 

If your award covered both tuition and room and board, the amount you use for tuition is tax-free. However, the amount you used for room and board is taxable.

The fact that the recipient does not spend the whole amount towards education or that he is able to save something out of it would not detract from the character of payment being one for a scholarship.


Handful of Exceptions

The stated IRS rules apply to both merit and athletic scholarships, fellowships, grants, and need-based pell-grants. However, like every rule, it comes with an exception.

Payments made through the GI Bill aren't considered scholarships, nor are they considered taxable income. 

National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship, and the Financial Assistance Program has some students who participated in these programs. 

These programs do not generally pay taxes on their aids for the qualified expense.

Student loans are not considered taxable and have to be repaid. The student loan here is not considered as an income that makes them tax-free. 


Bear in mind the Deduction 

To put it simply, the tax deduction can reduce your taxable income. Woefully, after the tax year 2017, one of the two previous deductions, the tuition, and fees deduction. 

If you pay some interest in your student’s loan you may be eligible to deduct up to $2,500, provided your 2019 MAGI is less than $85,000 ($170,000 if filing a joint return).


Conclusion

Getting a scholarship or grants to pay for your tuition fees is a great achievement. Make sure you utilize it properly and maintain it tax-free. 

Keep up with your scholarship money and call the organization to make sure you do not have any doubts regarding annual tax returns.