The IRS considers scholarships, general educational grants, and fellowship grants to be tax-free if the student receiving the scholarship or grant meets the following criteria:
- Students are degree candidates seeking to earn a B.A., B.S., M.A., M.S., or Ph.D. from a higher education institution that maintains the regular enrollment of students, curriculum, and faculty.
- Funds students receive are intended to pay for tuition and fees associated with enrolling and purchasing books and supplies necessary to complete courses leading to the award of a degree.
For example, a student planning to enroll in college business courses receives a $20,000 scholarship from a local organization. The student enrolls in courses for a B.S. in Business Administration in four years. However, the student uses $16,000 to pay for tuition and the remaining $4,000 to pay for renting a room near the college. Therefore, the IRS considers the $4,000 spent on room and board as taxable income.
How Do You Report Income from Scholarships on Taxes?
Students may need to pay scholarship taxes if they use any amount for incidental expenses. Optional supplies, travel costs related to getting to the school (gas, bus passes, etc.), and room and board are considered incidental expenses by the IRS.
Students should also report scholarship funds as gross income if they received a scholarship for research, teaching, or another service required to receive money.
Exceptions to this rule include receiving scholarships or grants for:
- Armed Forces Health Professions Scholarship and Financial Assistance Program services
- National Health Service Corps Scholarship Program services
- Work/learning/service programs defined in the Higher Education Act of 1965 (Section 448e)
To report scholarship funds as gross income on Form 1040, include taxable amounts in total amounts that are reported on Line 1a. In cases where a taxable amount isn’t found on W-2s, enter this amount on Line 10 of your 1040 federal tax return.
Do You Have to Make Estimated Payments for Scholarship Taxes?
Students should be aware that if any portion of a fellowship grant or scholarship is taxable, they may need to make estimated tax payments on what the IRS considers to be “additional income.”
Normally, taxes are automatically taken out of wages throughout the year. Students using part of their scholarship for incidental expenses might consider paying estimated taxes on this income to avoid owing a lump sum tax amount at the end of the year.
Additionally, students working and receiving wages can ask their employer to withhold extra taxes from each paycheck to avoid a big scholarship tax bill.
Do Parents of Students Report Scholarships on Taxes?
No, parents of students who receive scholarships or grants do not need to report those funds on their tax returns. However, parents of college students may be able to claim that student on their tax return as a dependent.
The IRS lists the following criteria that a student must meet in order for their parents to claim them as a dependent on their tax return:
- Under age 19 (or under 24 if a full-time student for at least five full months each year)
- Permanently disabled (any age)
- Lives with the parent for at least six months out of a tax year
- U.S. citizen, resident, national, or a resident of Mexico or Canada
College students who are not claimed as a dependent on their parent’s taxes, or anybody else’s taxes, may qualify for tax credits intended specifically for college students. These tax credits include the American Opportunity Tax Credit and the Lifetime Learning Credit.
Do Education Credits Reduce Scholarship Taxes?
Education credits can help reduce scholarship taxes when scholarship funds are used to pay for tuition, fees, and supplies. Expenses that do not qualify for the American Opportunity Tax Credit or the Lifetime Learning Credit programs include room and board, insurance, transportation, and medical costs.
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