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Are Scholarships Taxable? Here’s What Grads Need To Know

Scholarship
CAMBRIDGE, MA - FEBRUARY 22: The Maclaurin Building is shown on the campus of the Massachusetts Institute of Technology February 22, 2006 in Cambridge, Massachusetts. The Institute admitted its first students in 1865 and continues with the mission to advance knowledge and educate students in science, technology, and other areas of scholarship. (Photo by Joe Raedle/Getty Images)

If you have a scholarship, you probably don’t know that Uncle Sam may or may not demand his fair portion of your tuition, depending on how you and your parents use it.

The Internal Revenue Service sees several other items in your tuition as taxable income. Here are a few of the unexpected things you should be aware of when it comes to your school tuition.

Scholarship

CAMBRIDGE, MA – FEBRUARY 22: The Ray and Maria Stata Center is shown on the campus of the Massachusetts Institute of Technology February 22, 2006 in Cambridge, Massachusetts. The Institute admitted its first students in 1865 and continues with the mission to advance knowledge and educate students in science, technology, and other areas of scholarship. (Photo by Joe Raedle/Getty Images)

Scholarships Not Taxed, Depending On How You Use It

Scholarships that cover acceptable educational expenses at approved schools are often exempted from tax, Turbo Tax said. The same holds true for grants obtained to cover certain educational expenses. In other words, the amount of the scholarship and how it is used will determine whether it is taxable. In reality, at least a portion of these scholarships may be taxed.

For a scholarship to be exempt from taxation, the IRS requires particular requirements. A scholarship is only exempt from taxes if :

  • You are an applicant seeking a college degree;
  • You attend a reputable university or college;
  • It doesn’t go above your eligible educational costs. 

There are no additional unqualified uses for it (such as room and board). It doesn’t imply that you’ve been paid for any labor or services rendered. 

A candidate for a degree is someone who either attends primary or secondary education (K–12) or enrolls in college to work toward a degree, according to the IRS.

However, Schwab reiterated all funds must be spent for eligible educational costs to be totally tax-free. 

For instance, your son or daughter wouldn’t have to pay taxes on the $10,000 scholarship if her tuition was $15,000 instead. The $5,000 would be regarded as taxable income if her scholarship was worth $20,000 and $5,000 went toward room and board.

ALSO READ: Retirement Vs. School Tuition: Parents Should Put Themselves First

Taxable Scholarship Funds

Some funds are tax deductible, another TurboTax report mentioned. After paying your eligible school costs, you must include any money you may still have in your total taxable income. Therefore, using your tuition money to pay for the following items will count as income for determining your tax liability: 

  • Board or lodging;
  • Utilities; and
  • Further unqualified costs (including school supplies not listed as required in your program). 

If you have money left over after paying your eligible educational fees and utilize it for other needs, it will often be considered taxable income. 

For instance, you would be forced to pay taxes if you used your scholarship money for optional reading tasks that didn’t count toward meeting course requirements and weren’t required of every student.

RELATED ARTICLE: Alabama Lawmakers Are Considering Of Giving Tax Rebates To Eligible Taxpayers

 

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