Scholarships and Taxes

‘Tis the season for back to school and off to college. In the general hustle and bustle of registration, shopping, moving and celebrating, it’s easy to forget the little details. If you have been lucky enough to receive one or more scholarships to help pay for your (or your student’s) education, you will need to ascertain whether or not those funds are taxable. Yes, taxable. Uncle Sam is going to require that you (or your student) pay taxes on the amount that is deemed income.

According to IRS Publication 970, your scholarship is tax-free if it meets certain conditions. First, you must be using the money to attend an educational institution (a school) that has a faculty (teachers/professors), a curriculum (stuff that it teaches), students, and a place where the students go to learn. Hopefully, this is not a problem. Next, you must use the scholarship money to pay for the tuition and fees required to enroll and attend, and for fees, books, supplies and equipment needed for the courses taken. Scholarship money used in this way is tax-free and this is important to know when you are planning for educational expenses.

If, however, you are planning to use scholarship money to pay for the items below, you will need to keep track of the amounts you spend because you will need to claim this amount as income for tax purposes:

• Room
• Board
• Travel
• Optional equipment (equipment not required for a course)
• Incidental expenses

When a student receives any payment for services rendered, including research and teaching (being a TA, for example), those payments are usually considered income and subject to taxation. Estimated tax payments may be required if any part of a grant or scholarship is considered taxable. Services rendered for certain scholarship programs are not considered income and are not taxed. Those programs are, specifically, the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship and Financial Assistance Program.

If your college financing is complex and varied in terms of the sources of financing you are using to fund the education, you might consider seeking advice from a financial planner. Careful planning is the key to making the most of your education dollars.