Are Scholarships Tax Free?
If you are a regular reader of this blog, you probably know by now that Friday is Scholarship Friday.
That’s when I post about three scholarships with upcoming deadlines and try to motivate you guys to go out there and get some “free money.”
Well, today I need to come clean with you all. While it’s still an unbelievably good deal to pay for college with someone else’s money, that money might not be entirely free. That’s because with some scholarships, you might just owe Uncle Sam his cut. Now this isn’t always the case — sometime the money is completely tax free. But the distinction is tripping enough of you up that I wanted to review the rules with you today.
Whether or not you received a W2 with your scholarship or grant, you may still owe taxes on some, part or all of the amount. Here’s how you figure it out.
When you owe all:
- If you are not a candidate for a degree, then you must claim the entire amount of the scholarship as income. The value of the scholarship will be taxed at your current income tax rate. So let’s say you are in the 25% bracket and you win a $1,000 scholarship for your non-degree course of study (i.e. you won’t be graduating with a BA, MA, PhD, etc. as a result of your studies). Come April of the following year, you will owe the government $250 in taxes on your $1,000 scholarship.
- If you win a scholarship prize through a contest which does not require to you to use the winnings for your education, the full amount must be claimed as income. If you can use the money for any purpose, then you will generally owe taxes on all of your winnings.
When you owe none:
- If you are a student working toward your degree and you receive a scholarship that is applied fully to the cost of your tuition, fees, books or equipment, you will not owe any taxes on the value of that scholarship. So let’s say you are working on your Master’s degree and you win an $8,000 scholarship. The cost of your tuition is $12,000, so you apply the entire scholarship to your tuition bill. You will not be required to claim the scholarship as income on your tax return.
When you owe some:
- If you are a candidate for a degree, you will owe taxes on the portion of the scholarship not being used for tuition, fees, books or equipment required for your coursework. So let’s say you are studying for your B.A. and you win a $10,000 scholarship. Your tuition, fees and textbooks only cost $4,000, so you apply the balance of the scholarship ($6,000) toward your room and board bill. You are required to claim the $6,000 as income on your tax return. If you have additional sources of income on which you are assessed a rate of, let’s say, 25%, then you will owe that same 25% on the $6K. Keep this in mind when you allocate your scholarship money, as you may prefer to set aside the $1,500 right away.
For additional information on when and how to report scholarship winnings on your income taxes, see IRS.gov for their article on scholarship income.