Scholarships are a common and great way to pay for part of tuition, if not all of higher education’s expensive tuition. Scholarships will typically be applied to tuition or allowed for college expenses such as living, books, or supplies. A common question we receive is, are scholarships counted in income? Do you have to pay taxes on them? The answer is maybe, hopefully not.
The general rule that applies is that if the scholarship is used to cover tuition and fees then it is not taxable; however, if the scholarship may be applied to other things such as living expenses it may be subject to income tax. In fact, sometimes a school may say they are awarding a tax free scholarship, but if it is used for things outside the scope of tax free scholarships it is taxable income.
For a scholarship to be tax free there are two condition that must be met:
Student is a degree-candidate at an education institution that maintains a regular faculty and curriculum. The school must have a regularly enrolled body of students in attendance.
The money received is used to pay for tuition and fees necessary for enrollment or for books, fees, supplies and equipment needed for courses.
Scholarships that cover incidental expenses such as room and board, travel, and food are taxable so plan your school scholarships and expenses accordingly.
College is expense, there is no way around it, but scholarships and financial aid help a great deal. Be sure to choose a school that best suits your future and plans. If you have questions about scholarship taxation contact us at the Center for Financial, Legal & Tax Planning, Inc.