How Scholarships and Grants Affect Your Taxes
Figuring out how you’re going to pay for college is one of the most stressful parts of the college experience.
There are few things more exciting than winning a scholarship. If you’ve won a scholarship or grant, you have good reason to celebrate.
But, before you get carried away with joy, there are important details you must figure out about your scholarship. One of these is how they will affect your taxes.
How Do Scholarships Affect Taxes?
If you are still a high school student, there’s a good chance that you’ve never had to worry about taxes. Now that you have won a scholarship or grant, it’s important that you get in the know.
You will need to determine whether your award is taxable. If it is, you need to report it when filing your yearly tax return. The IRS provides a tool to help you determine if your award is considered taxable income.
In general, if your scholarship covers education-related expenses, you don’t have to pay taxes on it. The IRS refers to these expenses as “qualified education expenses.” This includes things like tuition, fees, books, and supplies.
For your award to be counted as tax-free, you must be a full- or part-time student at an accredited university.
If you have taken out student loans or receive pell grants, you don’t need to worry. These are also not considered taxable income.
Are Scholarships and Grants Taxable Income?
Any scholarships or grants you receive for non-qualified expenses count as taxable income. This includes expenses like room and board, travel, and other fees not required by your school. You will need to pay taxes on these expenses.
There are other types of scholarships and grants which are considered taxable income. For example, if you get work-study, work as a teacher’s assistant, or receive some other stipend. These are considered to be jobs and for this reason, you must pay taxes on the income you receive.
If you win a scholarship that covers tuition plus room and board, the tuition portion is tax-free. But, the money you use to pay for your room and board must be reported.
Reporting Your Taxable Income
If your scholarship is tax-free, you won’t need to worry about reporting it or filing a tax return. But, if any of your scholarship is taxable and not recorded on your W2, you’ll need to report it.
This may be confusing to do on your own if you don’t have any prior experience. Here are some tips to help you:
- File all financial statements and forms you receive throughout the year. Make sure you keep all documentation.
- Make use of free versions of tax programs. Turbotax or TaxAct can help you file your taxes. An accountant is probably an unnecessary expense, as you don’t have many forms to fill out.
- Talk to an advisor at your school or the financial aid office. It can be complicated to figure out the forms on your own.
The 1098-T Form
Around tax time, your college should send you an IRS Form 1098-T. This form details the amount of money you have received from scholarships and grants.
The form is one page. It requires the school’s tax information, your tuition payments received and billed, and the scholarships you have won.
The form lists tuition and qualified expenses. Because room and board and non-required expenses do not qualify, they aren’t listed on the form.
The information on the form will help you calculate the credit you can claim on your tax return.
Hold onto the form and use it when you prepare your income tax return the following year.
How Does Financial Aid Affect Tax Return?
Now that you’ve figured out if your scholarships and grants are taxable income, it’s important that you report that information correctly on your tax returns. Anybody with reportable income must file tax returns every year.
If all of your scholarships and grants are tax-free, you don’t need to worry about this step. But, if any of your scholarship or grant is taxable, you must report it.
Understanding how scholarships and grants affect your taxes is important. You don’t want to miss reporting a scholarship and then get in trouble with the IRS later on. Make sure that you stay organized and file any financial documents you have.