Congratulations, you’ve been awarded a scholarship or fellowship grant to help you out on the path of higher education. However, were you aware that landing that scholarship could also land you a tax bill come tax time? It’s a little-known fact that the IRS does indeed tax some types of scholarships as income. There are, of course, rules and stipulations regarding the taxation of scholarships and fellowship grants. IRS Publication 970, Tax Benefits for Education, goes into detail on the various tax implications of pursuing your education, and how to go about reporting scholarships that are not tax-exempt.
What Are Tax-Free and Taxable Scholarships?
The IRS classifies scholarships and fellowships grants as either tax-free or taxable. According to the IRS Publication 970, “A scholarship or fellowship grant is tax free only to the extent: It doesn't exceed your qualified education expenses; It isn't designated or earmarked for other purposes (such as room and board), and doesn't require (by its terms) that it can't be used for qualified education expenses; and It doesn't represent payment for teaching, research, or other services required as a condition for receiving the scholarship.”
In layman’s terms, if you receive a scholarship or grant, and it is used solely for the cost of your tuition, books and supplies needed for courses related to obtaining your degree from an eligible educational institution, then this type of scholarship is tax-exempt. Scholarships or grants received from the Armed Forces Health Professionals, National Health Services Corps or a Financial Assistance Program are also exempt for tax purposes.
If your scholarship or grant includes provisions for travel, room and board or any supplies, books and equipment not needed to obtain your degree, then all or a portion of your scholarship is taxable. Some scholarships provide for both living expenses as well as tuition and other fees. In this instance, you would have to report and file taxes on the room and board you were given, but you would not have to claim the portion of the scholarship or grant that was earmarked and used for your tuition or books.
Reporting Income from Taxable Scholarships
While certain scholarships and grants are subject to tax, it doesn’t mean that you are automatically required to file. The IRS has income thresholds in place to determine if taxpayers are required to file a return in a given year. The income thresholds before you must file a return are adjusted annually to account for inflation, and vary depending on your filing status. To find out if you are required to file taxes for a particular year or not, visit the IRS’ website and use the Interactive Tax Assistant tool to help you determine your filing requirement and status. In order to complete the tax assistant interview, you’ll need basic information on how to calculate your gross income (including taxable scholarships), your filing status and any federal taxes you had withheld.
When you’re awarded a scholarship or grant, you will receive an IRS Form 1098-T. This form is similar to a W-2 or 1099-MISC that employees receive, as it details the amount of income you received in the form of a scholarship or grant. Unless you’re a dependent, you have to report the information from your 1098-T on your personal tax return using IRS Form 1040. These grants are claimed in the year they were received, and not the year they were actually applied. For example, if you received a grant in late 2016, but did not use it until 2017, you would have to report this income on your 2016 return. For help in filing taxes and navigating Form 1098-T, go to the IRS’ website and use the worksheet "Instructions for Forms 1098-E and 1098-T – Student Loan Interest Statement and Tuition Statement."
- IRS: 2017 Publication 970 – Tax-Free Scholarships and Fellowship Grants
- IRS: 2017 Publication 970 –Taxable Scholarships and Fellowship Grants
- IRS: Do I Need to File a Tax Return?
- IRS: What Is My Filing Status?
- TurboTax: Do I need to claim Scholarships and Grants I received on the 1098-T form as income?
- IRS: 2017 Instructions for Forms 1098-E and 1098-T – Student Loan Interest Statement and Tuition Statement
- Creatas/Creatas/Getty Images