Are Grants Taxable Income?
Scholarships are a great way to ease some of the high costs of college. But, when it comes to financial aid, even money which you are winning for “free” could end up costing you money in the form of income tax. The following points should help you determine when grants are taxable income so that you know how to file your taxes.
It is important that you know whether the scholarship money you won is tax-free or taxable. This will save you from unpleasant surprises later on.
A scholarship is completely tax-free, and not considered income, under two conditions:
- You are pursuing a degree at an eligible institution, meaning it has a consistent staff, curriculum and enrolled student body.
- You use the scholarship money for tuition and other fees like books, supplies and equipment. These must be items which your course requires from all students.
So, if you use the scholarship money to pay for classes or school books, you won’t have to pay tax on the money.
Other Tax-Free Scholarships
- Veteran Scholarships
- Athletic Scholarships
- Need-Based Education Scholarships
- Fulbright Scholarships
There are some circumstances where your scholarship money is not tax-free. If you are aren’t in a degree program, then your scholarship money will always be taxable.
Also, if you use any of the scholarship money to pay for expenses other than tuition and required supplies, it will be considered taxable income.
Expenses which aren’t considered tax-free include:
- Research or teaching stipend
- Books and supplies which are not required for your course. For example, if a teacher recommends but doesn’t require a book.
If you use scholarship money on any of the items in the list above then you must pay taxes on them. If you receive a scholarship which covers both tuition AND room and board, only the money spent on tuition will be tax free. On the rest, you must pay taxes.
For example, if you win a $25,000 scholarship and the tuition of your school is $20,000, you would still have to pay taxes on the remaining $5,000.
Education Tax Credits
If you are disappointed to hear that you may need to pay taxes on some of your scholarship money, wait a moment. You will be happy to know that there are tax credits and deductions to help students.
The most common one is the American Opportunity Tax Credit. This is a $2,500 yearly tax credit that undergraduate students can receive for four years of study.
Of course, there are different eligibility rules for education credits and tax deductions. It is best that you check with the IRS. You can use their free tool to determine eligibility.
How to claim taxable scholarships
If you need to pay taxes on some (or all) of your scholarship, you might receive a W-2 form from the scholarship provider. If you would like to understand the exact amounts that you need to report as taxable and non-taxable, visit the official IRS web page.
You may need to use one of the following forms to report the taxable part of your scholarship:
- 1040 – U.S. Individual Income Tax Return
- 1040A – U.S. Individual Income Tax Return
- 1040EZ – Income Tax Return for Single and Joint Filers With No Dependents
- 1040NR – U.S. Nonresident Alien Income Tax Return
- 1040NR-EZ – U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents
If you are a dependent student (you are under 19 years of age) or a full-time student under 24 years of age, your parents need to report your scholarship money on their tax return.
Because scholarships give you the opportunity to get an education that you might not have otherwise, the IRS is usually pretty flexible when it comes to reducing your tax requirements. But sometimes scholarship money does count as income, so that’s why it’s important that you check.
If you’re not sure if your scholarship is taxable, ask the organization which is granting you the scholarship. They should be able to tell you whether the grant is taxable or not.
If you need more help figuring out whether your scholarship is taxable, see the IRS Worksheet.
Finally, always remember to hold onto your receipts for money spent on textbooks, supplies and equipment.
So, are grants taxable income? Yes and no. Make sure you do all the necessary checks so that you know what taxes you and your parents need to file.