Are scholarships and grants subject to the federal income tax? The answer is sometimes. The non-taxability of a scholarship really depends on four factors: 1) whether the recipient of a scholarship or grant is enrolled in a degree program at an eligible educational institution; 2) the scholarship or grant doesn’t represent payment for work performed; 3) the scholarship or grant doesn’t eclipse the amount of qualified education expenses; and 4) the amount received is not allocated for amounts other than qualified education expenses. I’ll address each one of the list above in turn.

For almost every reader’s purpose here, an eligible educational institution is essentially an accredited undergraduate university or college or a trade technical school that prepares its students for entry into a specific occupation. Not only must the student be enrolled in such a school, he or she also has to be pursuing a program that either grants a degree or will graduate the student ready to work in a particular trade or job.

Additionally, a scholarship or grant represents payment for work performed, and is therefore taxable, if the student is required, for example, to teach a course at the school, or work in one of the school’s libraries, in order to receive the award. Basically, any work done as a requirement of eligibility for the award makes the scholarship or grant taxable.

Furthermore, if the amount of the scholarship or grant is over and above the amount of qualified tuition expenses, the excess is taxable. Qualified tuition expenses are: tuition, fees, books, supplies, and equipment required for a given course. The following are not considered qualified tuition expenses: room and board, travel, the cost of research, and the cost of clerical help.

Somewhat related to the previous point, if part (or all) of the scholarship or grant must be spent on non-qualified tuition expenses, that amount is taxable, but only that portion that is mandated to be spent in a non-qualified way. 

Finally, a bit about reporting taxable scholarships or grants, if you must report such amounts, do so by including only the taxable amount on line 1 of Form 1040, making sure to add “SCH” in the area immediately to the left of the fillable field on the dotted line. It’s important to remember that some amount of scholarship or grant may be taxable, but that this does not necessarily mean that the whole award is taxable. To recap, generally only the amount of a scholarship or grant not fulfilling the requirements above is taxable, which means that if some portion of the same award does meet the standard, such amount would not be taxable.

If you would like more information on the federal tax implications of education, please refer to IRS Publication 970, Tax Benefits for Education.

Moreover, if you have any issues with your taxes, whether those issues be about scholarships, grants, or any other federal tax matter, call Dino Tax Co at (713) 397-4678 or email us at davie@dinotaxco.com, and we can set your tax issues straight. The initial consultation is free of charge. Also, consider liking us Facebook: https://www.facebook.com/dinotaxco