Is My Scholarship Taxable? Understanding the IRS Implications

July 29, 2011 | By: TaxCure Staff

taxable scholarshipsIf you are fortunate enough to have received a full or partial scholarship to use toward your educational studies, it is important for you to be aware that you may be taxed on some or all of the money that you receive. Depending on what the scholarship money is spent on or used for, the IRS may very likely classify the funds as taxable income. If you have received a scholarship, you will want to carefully determine whether or not the money you received needs to be claimed on your end-of-year tax return.

If you have received a scholarship, here is some important tax-related information that you will need to know:

What Portion of the Scholarship is Tax-Free?

All or part of the money that you received as a scholarship may be tax-free; it all depends on how the money is spent and on the institution that you will be attending it. According to the IRS website, the following criteria must be met in order for the scholarship money that you have received to be tax-free:

  1. The scholarship money must be used for approved tax-free expenses, including your tuition costs and other fees required by your school. Additionally, if your scholarship money is used to pay for items such as assigned textbooks and other necessary supplies or equipment required in your studies, then that portion of your scholarship money may also be tax-free as long as other requirements are met.
  2. You must use your scholarship money to attend an educational institution that the IRS deems eligible. In order for the school to be classified as eligible under IRS guidelines, it must maintain a regular faculty, have a regular curriculum, and have regularly enrolled students.
  3. The scholarship funds must be used to attend a college or university where the recipient is receiving educational credits toward a bachelor’s degree or other higher education degree. Your scholarship money may also be tax-free if used for a training program where you, as a student, are being trained to graduate coursework and receive gainful employment.

What Portion of the Scholarship is Not Tax-Free?

Part – or even all – of your scholarship money may be taxable. There are several items that the IRS classifies as incidental, and the cost of these items must be included in the gross income amount that you report on your tax return. This includes any scholarship money that is spent on or used for any of the following:

  • Room and board
  • Travel
  • Any supplies or equipment not required by your enrollment

It is important also to know that any portion of a scholarship that represents payment for services (past, future or present) is generally taxable, which includes research and teaching. Exceptions include payment for services under the National Health Service Corps Scholarship Program, and the Armed Forces Health Professions Scholarship and Financial Assistance Program while meeting requirements 1-3 above.

Everything Else You Need to Know

If you determine that all of your scholarship money is tax-free, then you do not need to worry about claiming any of the scholarship funds received on your tax return. However, if part – or all – of your scholarship money was used to pay for items other than those approved by the IRS as being tax-free, you will need to claim the scholarship money as income on your tax return. Additionally, you may want to consider making quarterly estimated tax payments throughout the year in order to avoid paying penalty fees later on.

Find More Information

If you have received a scholarship and are still not sure whether or not the money you received is taxable, you can visit the IRS website for a full list of criteria. It is always highly recommended that you be proactive in visiting the IRS criteria on scholarships. If after visiting the IRS website you are still unsure of what to do, your best bet may be to seek out the help of a tax expert (tax accountant, enrolled agent, or licensed tax preparer will do) who can assist you in preparing and filing your taxes.

Furthermore, whether you received a scholarship or not, if you are applying for or are paying back student loans it will be helpful for you to determine whether your student loan interest is tax-deductible.