Are Scholarships Taxable?

A scholarship is a gift, so many students assume it is tax-free. Often it is. But sometimes a part of it counts as taxable income, and students who ignore that part can be surprised by a notice from the tax agency or by a smaller refund than they hoped. The rules are not hard once you know the logic: money used for tuition and required course costs is generally tax-free for degree candidates, while money used for living costs, or given in exchange for work, is generally taxable.

Tax rules change and depend on your circumstances, so this guide quotes no amounts. It is general information, not tax advice. Check the current instructions from the federal tax agency, and ask a qualified preparer or a free tax clinic if your situation is complicated.

The general rule for degree candidates

For a student who is a candidate for a degree at an eligible educational institution, a scholarship or fellowship grant is generally tax-free to the extent it is used for qualified education expenses. These are typically:

• Tuition and fees required for enrollment or attendance.
• Books, supplies and equipment required for courses, where all students in the course must buy them.

The amount that exceeds qualified expenses, or is used for other things, is generally taxable. This includes money spent on:

• Room and board.
• Travel.
• Optional equipment.
• Living costs of any kind.

So a scholarship that pays tuition in full is usually tax-free. A scholarship that pays tuition and a stipend for living costs may be taxable to the extent of the stipend.

Who counts as a degree candidate

A degree candidate is generally someone who attends an educational institution that provides a degree program and who is pursuing a degree, or who is a student working toward a recognized educational credential at a qualifying school. Non-degree students, such as those in certain certificate courses, may be treated differently. Check the rules if you are not in a degree program.

What counts as an eligible educational institution

Generally, schools that maintain a regular faculty and curriculum and have enrolled students in attendance. Most colleges and universities qualify. Vocational schools may qualify under some conditions. Check if you attend an unusual institution.

Payment for services

Even when called a scholarship, an amount is generally taxable if it represents payment for teaching, research or other services you must perform as a condition of receiving the money. Common examples:

• A teaching assistantship with a stipend.
• A research assistantship with a stipend.
• An award that requires work hours.

These are generally wages or similar income, not tax-free scholarships. Tuition remission may be treated differently in some cases, for example for graduate students under certain rules. Ask your institution's payroll or graduate office.

Amounts reported on forms

Colleges report scholarships and grants in certain boxes on Form 1098-T, but the form does not tell you whether the money is taxable. Our guide to Form 1098-T explained describes the boxes. You still have to compare scholarships with your qualified expenses.

If your scholarship is taxable and you received no form, you must still report it according to the instructions for your return. If you worked, you may also receive a W-2 for taxable stipends.

How to work it out

1. Add up your scholarships and grants for the year, including those from outside organizations.
2. Add up your qualified expenses: tuition, required fees and required books and supplies you actually paid for.
3. Subtract. If the scholarship is more than qualified expenses, the excess is generally taxable.
4. Check the terms of the award. If the donor says it is for room and board, or requires work, treat that portion as taxable.
5. Report any taxable amount on your return as the instructions direct.
6. Keep a worksheet and receipts.

Tax software usually guides you through this.

Scholarships and education credits

Education tax credits are based on qualified expenses paid, reduced by tax-free aid. This creates a trade-off. Our guide to education tax credits explained describes the rules. In some cases:

• Choosing to treat part of a scholarship as taxable frees up tuition expenses for a credit.
• The credit may be worth more than the tax on that income, especially if the student has low income and is in a low tax bracket, or the credit is claimed by a parent.
• The result can be worse if the taxable income pushes the student into higher tax or reduces other benefits.

Run the numbers, using good software, a free tax clinic or a preparer. The best answer depends on your income, who claims the student and the credit's limits.

Other kinds of aid

Grants. Treated similarly to scholarships. Qualified expense use is tax-free for degree candidates, and the rest is taxable.

Fellowships. Treated like scholarships if for study. If tied to services, taxable.

Work-study. Wages from work-study jobs are taxable income, though other rules might exempt some payroll contributions for student workers.

Student loans. Not income, because they must be repaid. Loan forgiveness can be taxable in some programs.

Employer education assistance. Some employer payments for education are tax-free within limits. Check current rules.

Veterans and military education benefits. Often tax-free, with special rules.

Tuition waivers. Rules depend on the type of waiver and the student's role.

Prizes and awards. Money won in competitions is generally taxable, unless it qualifies under special rules.

Outside awards from employers, organizations or foundations. Treated like scholarships if for study, but check the terms.

State aid and grants. Usually follow similar rules.

International students

Scholarships for international students can have special tax rules, depending on residency status for tax purposes, tax treaties and the visa. Some parts may be taxed at a flat rate if the student is a nonresident alien, and withholding may apply. Colleges often have guidance and software for international students. Ask your international office.

Reporting taxable scholarships

If part of your scholarship is taxable:

• Include it as income on your return, following the instructions for scholarship and fellowship income.
• Keep records of the amounts and what they paid for.
• Consider estimated payments, if you will owe tax and no one withholds it.
• Check state tax rules, which may differ.

If you do not have to file because your income is low, taxable scholarship income may still affect whether you must file. Check the filing requirements, and consider filing for credits.

Other countries

In Canada, many scholarships for students in qualifying programs are exempt from tax, within rules. In the UK, scholarships and bursaries are generally not taxed for students, though some payments for work are. Rules differ, so check your own country's tax authority.

A short worked example in words

Imagine a degree student whose scholarship pays tuition and a living stipend. She adds up her tuition, required fees and required books, and finds that the scholarship covers all of them with some left over. The leftover, which she spent on rent, is taxable. She reports it according to the return instructions, keeps her award letter and receipts, and checks whether treating a little more as income would unlock an education credit for her parent. She runs the numbers in tax software and finds that the simpler approach gives the better result.

Careful sorting, not guesswork, kept her return accurate.

Questions to ask the scholarship provider

Ask the donor or the aid office how the award is described, whether any part is meant for living costs, whether service is required and whether a tax form will be issued. A short email can clarify the tax treatment before you spend the money. Keep the reply with your records.

Common mistakes

• Assuming all scholarship money is tax-free.
• Ignoring stipends and housing allowances.
• Treating payment for work as a scholarship.
• Not tracking required books and supplies.
• Not keeping the award letter.
• Forgetting to report taxable amounts without a form.
• Using the same expenses for a credit and for tax-free treatment.

A quick checklist

• Do I know my total scholarships and grants for the year?
• Do I know my qualified expenses?
• Do any awards cover room and board or require work?
• Have I considered the education credit trade-off?
• Do I have records and the award letters?

Final thoughts

Scholarships are usually generous and often tax-free, but only to the extent they pay qualified costs. Know what your award covers, compare it with your tuition and required supplies and report any excess. Look at the credit trade-off and use free help. A little care avoids surprises and keeps more of your aid.