If you have scholarships for college or graduate level work, you need to know how that money is treated by the Internal Revenue Service (IRS) for the purposes of income taxes. Depending on your expenses and your status as a student, you may have to include that money on your income tax return as taxable income.
Scholarships refer to money paid or allotted to a student, an undergraduate or graduate student, to pay for the costs of study. The money must be designated for paying for your education. For example, if you win a prize that you put toward your education costs but the prize does not require the amount to be spent on education, it is taxable, even if you win it in an academic competition. Scholarships are not paid in return for services, such as money paid to students as part of a work-study agreement.
Taxable Vs. Nontaxable Costs
Scholarships may be taxable depending on what expenses you pay for with them and if you are a degree-seeking student. If you are not a degree-seeking student, all of your scholarships are taxable. If you are a degree-seeking student, your scholarships used to pay tuition and any fees, books or supplies required for all students do not get taxed. However, even for degree-seeking students, money used for room, board or travel counts as taxable income.
When you have taxable scholarship income, you must report it on your income taxes as part of your taxable income for the year. If you use Form 1040EZ, the scholarship income is included on Line 1. For Form 1040A and Form 1040, the taxable portion of the scholarship goes on Line 7. Unless your school gives you a W-2 form for the scholarship, next to the line that you report the scholarship on, write "SCH" and the taxable amount of the scholarship.
How Scholarships Are Taxed
Taxable scholarships add to your total taxable income for the year. The IRS treats them as unearned income, meaning they do not get hit with FICA taxes or self-employment taxes. For example, if you have $10,000 in other taxable income and $5,000 in taxable scholarships, your total taxable income for the year would be $15,000. Your income, including your taxable scholarships, is then taxed at the standard income tax rates for your filing status.
- Internal Revenue Service: Publication 970; Scholarships, Fellowships, Grants, and Tuition Reductions
- Internal Revenue Service: Tax Information For Students
- Internal Revenue Service. "What Is an Eligible Educational Institution?" Accessed Oct. 17, 2019.
- National Scholarship Providers Association. "Guide to the Tax Treatment of Scholarships," Page 1. Accessed Oct. 17, 2019.
- Internal Revenue Service. "Topic No. 421 Scholarships, Fellow Grants, and Other Grants." Accessed Oct. 17, 2019.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."