When it comes to taxes, it seems like the story is never simple. Add a scholarship to it and you get a situation which really needs to be looked into a little bit closer. The question of are scholarships taxable income or not gets quite a complex answer. Generally speaking, a scholarship isn’t regarded as income so it isn’t taxable. However, every scholarship, grant or fellowship might be taxable if they are considered income. Let’s see how we can categorize scholarships according to taxability and help answer the question of are scholarships taxable or not.
Scholarships That Are Tax-Free
Scholarships and grants can have parts that are taxable and parts that aren’t. For a scholarship to be completely tax-free, the whole amount of money must be used for qualified expenses. You must also be a degree candidate at a primary, secondary or accredited post-secondary institution (an institution with a regular faculty, curriculum and enrolled student base). If any part of the money is spent on something which is not a qualified expense, that part will be considered taxable income.
Qualifying Expenses For Tax-Free Scholarship
- Tuition & fees required to enroll and attend an eligible educational institution
- Course-related expenses. These expenses must be required by all of the students in your course
Non-Qualifying Expenses For Tax-Free Scholarships
- Room & Board
- Clerical Help
- Equipment & other expenses which are not required for enrollment or coursework
Other Tax-Free Scholarships
- Veteran Benefits – The IRS doesn’t consider funds veterans get for education or training to be taxable. But they recommend you to be careful of the tax implications of any other grants or scholarships received.
- Athletic Scholarships – Atheltic Scholarships are not considered as taxable income
- Need-Based Education Grants
If you have a scholarship where you are being paid by the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program, it is not regarded as a taxable income. It is the same case for services in work-learning-service programs. Although the above are intended to be tax-free scholarships, the same law applies. The money from the scholarship must be used on a qualifying education expense to be tax-free.
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When and How Are Scholarships Taxable
Any scholarship used for purposes of room and board, as well as other items that are not considered a qualifying expense are considered taxable. Also, scholarships awarded to students who are not in a degree program are always taxable.
How Do I File The Scholarship on My Taxes?
If your only income is a tax-free scholarship you’re off the hook. There is no need for you to file a tax return or report the award. However, if all or a part of your scholarship is taxable and if that money is not recorded on your W2 form (a tax form used to report wages paid to employees and the taxes withheld from them) you must report it.
Still Unsure If Your Scholarship Is Taxable?
If you’re not sure if your scholarship is taxable, ask the organization that sponsored it. They should provide you with the information regarding your award’s tax status. You can also use this worksheet to figure out if your scholarship is taxable or not.
If you have further questions contact your accountant or other tax professional. Another good option is to contact your local IRS office directly or find information on education tax benefits on their website.
Which Government Form Do You Need?
Here are the tax forms you may need regarding claiming scholarships, grants and fellowships:
- 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
Education Tax Credits
Education tax credits reduce the amount of income tax you pay and they could be a good method to cancel out some qualified college expenses. There are two possible credits available:
- American Opportunity Tax Credit (AOTC) —it allows an annual maximum credit of $2500 per student for four years of undergraduate education. If you want to qualify, your modified adjusted gross income (MAGI) should be up to $80,000. The credit is not for taxpayers with higher incomes.
- The Lifetime Learning Credit (LLC) — it allows a maximum of $2000 per year per tax return (not per student), but it applies to undergraduate, graduate or professional degree courses, for as many years as you need. Income limits are lower: your MAGI must be up to $55,000.
You can choose only one of the tax credits even if you qualify for both.
A tax deduction lowers your taxable income. There are two possible deductions for whatever your situation is.
- The tuition and fees deduction -it allows you to deduct qualified higher education expenses of up to $4000 paid during the year for yourself, your spouse or your dependent. The income limitation is the same as that for the AOTC.
- The student loan interest deduction of up to $2500, applicable with a MAGI of less than $65,000.
So are scholarships taxable? It might be it might not. Follow our guidelines above to help you understand when the scholarship is viewed as taxable income, and when it is not. When all else fails, give your accountant a call, and check out this taxable scholarship worksheet.
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply. (1)College Ave Refi Education loans are not currently available to residents of Maine. (2)The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation. (3)$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 9/24/2019. Variable interest rates may increase after consummation. (4)This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. Information advertised valid as of 9/24/2020. Variable interest rates may increase after consummation.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.