Scholarships are valuable resources to help pay for college. Depending on the type that you receive, however, you may have to pay taxes on these academic awards. You can prepare your tax returns and comply with the IRS by learning the difference between tax-free and taxable scholarships.
Tax-Free Scholarships
The IRS considers a scholarship to be exempt from taxation if it is given to an undergraduate or graduate student who studies either part or full-time at an accredited primary, secondary, or post-graduate school. The award must cover some or all of your tuition for studying at the university or educational institution.
Likewise, the IRS deems the award to be exempt from taxation if it pays for educational expenses like:
- school-related fees
- books
- equipment
- supplies needed for your courses or research
Taxable Scholarships
You do, however, have to claim scholarships as part of your income if you are given the money to help pay for other specific costs related to attending school as a part-time or full-time student. The IRS will require you to claim your award as taxable income if you are given the funds to cover expenses like:- room and board
- school-related travel
- undergraduate or post-graduate research
- hiring clerical help like a secretary or research assistant
- fees, books, equipment, and other supplies not required to attend classes or conduct research
If you use a taxable scholarship to pay for any of these expenses, you should receive a W-2 form in the mail from your university's fiscal services office. The IRS may require that you provide a copy of that form when you file your return.
Other Forms of College Financial Aid
Along with scholarships, you may receive other types of financial aid to help you pay for school. For example, you might qualify for subsidized or unsubsidized student loans as well as private student loans issued by a private lender. You also receive Pell grants or work study to help cover your tuition and school costs.
You do not have to pay taxes on student loans or Pell grants. However, if you participate in the federal work study program, you will need to claim any income that you earn while working as a student employee on your tax returns.
Claiming Scholarships on Your Tax Return
If you receive scholarships that you must claim as income, it is important that you utilize the correct tax forms when filing your return. It is recommended that you use the 1040, the 1040A, or the 1040EZ form when filing your taxes.
If you use the basic 1040 form, you should enter the taxable amount of your scholarship on line 1. If you did not receive a W-2 form from your university, you should enter SCH and the amount of the taxable scholarship on the left side of Line 1 in the allotted space.
You can also use the 1040A or 1040EZ form to file your return and claim your scholarship. Both of these forms call for you to enter the taxable amount of your reward on line 7. As with the 1040 form, you should enter the abbreviation SCH and the amount in the provided space to the left of line 7 if you did not receive a W-2 from your school.
Scholarships help many students pay for school-related expenses like tuition, books, fees, and more. However, you may need to claim this award on your taxes. You can prepare now to file your taxes by learning what academic awards the IRS requires you to include as part of your income this year.
