Please note: The following is general information regarding taxes and should not be interpreted to be legal tax advice. Please contact your professional tax advisor or the Internal Revenue Service (IRS) regarding scholarships and your tax situations or questions.
If you are a college student or recent graduate, you may owe taxes on some of the scholarships and grants you received over the past year. Typically, scholarships are "free money," but there are certain circumstances that require you to claim the scholarship benefit as income, which is taxable.
Determining whether scholarship awards are tax-free or not can be a bit confusing. In general, degree-seeking students who use scholarship awards for the following purposes will not have any tax liability:
*Please note that fees, supplies and equipment are tax-free only if all students in a course are required to purchase or acquire the same items. Also, if you are not seeking a degree, the above expenses are likely to be taxable. Be aware that any scholarship money used for travel, room and board, research, clerical help or equipment that is not necessary for enrollment is typically taxable, regardless of whether you are seeking a degree or not. Read the conditions of your scholarship award carefully, too; if the award letter or official rules prohibit the use of funds for any specified purpose (books, fees, etc.), then those funds would be taxable, as well.
Other awards may also carry a tax burden, especially those that require work or service to receive the funding.
For example, if you receive a scholarship (or an award that is often referred to as a "forgivable loan") that pays for your tuition, room and board and all other expenses, but is contingent upon you providing service after the completion of your degree (teaching, nursing, etc.), the entire amount of the scholarship would be taxable as a payment for services in the year the award is received (not when you fulfill your obligation).
However, if you receive a $5,000 scholarship which requires you to work part-time during the time of the award, the scholarship provider may give you a 1099 or a Form W-2. These forms should show which portion of the scholarship is payment for services you have provided and which portion is for educational expenses. The portion on your form categorized as wages (let’s say it's $2,000) would be taxable, while the remainder ($3,000) would be tax-free, provided the funds were used for allowed educational expenses as discussed earlier.
For the most part, the majority of scholarships, grants and other awards for degree-seeking students are tax-free, but certain circumstances may require that you claim them as income. While these general guidelines should assist you in determining which awards you must claim on your taxes this year, it is always best to consult the IRS website for additional information or talk to a tax professional to determine your total tax liabilities.
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