Bank Deal: Earn 1.00% APY on an FDIC-insured savings account at Barclays Bank.
With many high school seniors looking forward to heading off to college next year, I thought I’d spend a little time talking about a topic that I’m frequently asked about… Whether or not scholarships are taxable.
The tax treatment of scholarships is address in IRS Publication 970. For starters, let’s define some terms. The IRS defines a scholarship as:
“…an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate.”
In contrast, they define a fellowship as:
“…an amount paid for the benefit of an individual to aid in the pursuit of study or research.”
Is my scholarship or fellowship taxable?
As for the tax treatment of scholarships and fellowships, they are tax free only if:
- You are a degree candidate at an eligible educational institution, and
- You use the scholarship or fellowship to pay qualified education expenses
Defining a few more terms…
You are a degree candidate if you attend a primary or secondary school or are pursuing a degree at a college or university, or you attend an accredited institution that is authorized to provide a program that is acceptable for full credit toward a bachelor’s degree or higher, or a program of training that is designed to prepare student for gainful employment in a “recognized occupation.”
An eligible educational institution is one that maintains a regular faculty and curriculum and has a regularly enrolled student body in attendance “at the place where it carries on its educational activities.”
Finally, qualified education expenses (i.e., those eligible for tax-free treatment) include tuition and fees required to enroll at or attend an eligible educational institution, and course-related expenses such as fees, books, supplies, and equipment that are required for courses at such an institution.
Costs related to the following categories are not considered to be qualified educational expenses:
- Room and board
- Clerical help
- Non-required equipment or other expenses
If your scholarship or fellowship (or a portion thereof) does not meet the above requirements, then it is taxable.
The only exceptions to this rule are if your receive a scholarship or fellowship that represents payment for teaching, research, or other services from the National Health Service Corps Scholarship Program, or the Armed Forces Health Professions Scholarship and Financial Assistance Program, and you are a degree candidate at an eligible institution and you use part of the award to pay qualified education expenses.
Whew! Got that? Here’s a handy table from the IRS to help you sort things out…
So, in general terms, if you’re not a degree candidate, then your scholarship or fellowship will be taxable. If, on the other hand, you are a degree candidate, then scholarship or fellowship funds spent on tuition may be tax free if you use them to pay for tuition or fees, or required books, supplies, or equipment.
How to report scholarships and fellowships
If your only income is a tax-free scholarship or fellowship, then you don’t have to file a tax return. If all or part of your scholarship or fellowship is taxable, then you’re required to file a tax return – whether or not receive a W-2 form related to the award.
If you use Form 1040EZ, the taxable amount should be included in the total on line 1. If you didn’t receive a W-2, you should enter “SCH” and the taxable amount in the space to the left of line 1.
If you use either Form 1040A or Form 1040, the taxable amount should be included in the total on line 7. As above, if you don’t receive a W-2, then you should enter “SCH” and the taxable amount in the space to the left of line 7.
Depending on the amount in question, you may also have to file 1040 Schedule SE to figure your self employment tax. In general, if you have less than $400 in “self employment” income, including taxable scholarship or fellowship income, you will not have an additional tax obligation.
As with all tax issues, you should consult directly with the IRS, or a qualified tax professional, if you’re not 100% sure how to handle things.
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math (692)
- Dish Network Customer Service SUCKS (534)
- $8,000 Homebuyer Tax Credit (429)
- Pay Off Mortgage Early or Invest? (424)
- How to Claim the First-Time Homebuyer Tax Credit (352)
- Termite Control: Sentricon vs. Termidor (325)
- How Much Should You Pay a Babysitter? (284)
- Ethanol Blended Gas = Lower Mileage? (272)
- Reduced Credit Limits? Share Your Experience (256)
- $15,000 Homebuyer Tax Credit (242)
- Buying Furniture off the Back of a Truck (228)
- Will Mac OS X Lion Kill Quicken 2007? (191)