College can be very expensive and many students rely on scholarships and grants to help lower the cost of higher education.
When I attended Carnegie Mellon University, I had the help of need-based grants and a handful of merit-based scholarships. Back then, I was just glad to receive help and never even considered the tax implications. Fortunately, the tax code looks favorably at scholarships and grants.
If you are a student who received college scholarships or grants, here are some tax tips to help you understand how scholarships or grants impact your taxes.
Do you really have to pay taxes on a scholarship? The answer is… maybe.
Scholarships and Grants That Aren’t Taxed
The good news is that you won’t pay any taxes on scholarships or grants for what the IRS calls “qualified education expenses.” What qualifies as a non-taxable education expense? Any funds you receive to pay for tuition, school fees, books or any supplies required for courses at your school.
The IRS also notes that to qualify, you must be a “candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.”
There are no taxes to pay if you received a scholarship or fellowship as part of the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program. This also applies to anyone who is part of a qualifying work-learning-service program.
So what scholarships and grants ARE taxable?
Taxable Scholarships and Grants
If you paid for your qualified education expenses and have scholarship funds left over, that money counts as taxable income.
Any scholarship funds that go towards your room, board, or utilities are taxable. Any funds used for college expenses outside of the required supplies for your education are taxable too and applies to any school-related travel that is paid for by the scholarship or grant funds.
If your grants, fellowships or assistance programs require you to provide some type of service while enrolled in school, this could make them closer to a stipend or payment rather than a scholarship. For example, if you received a $10,000 scholarship and $4,000 was designated as compensation for teaching or research while at school, that piece would be taxable income. The remaining $6,000 may not taxable if used towards qualifying education expenses.