When a scholarship counts as taxable income
Whether a scholarship is taxable depends on what the money paid for and whether you are working toward a degree. The points below follow the IRS rules in Publication 970, so you can sort each award and keep the records that support your tax return.
The part that is generally tax-free
For a student working toward a degree at an eligible school, scholarship money used for tuition and required enrollment fees is generally tax-free. The same applies to books, supplies and equipment that your courses require of every student in them. The IRS calls these qualified education expenses for this purpose.
The terms of the award matter too. If the sponsor's terms require the money to be spent on housing or another cost outside that list, that part is generally taxable even if you would rather have applied it to tuition.
The part that is generally taxable
Scholarship money used for housing, food, travel, optional equipment and other living costs is generally taxable income. Money paid in return for work, such as teaching, research or other services the sponsor requires, is generally taxable as well, even when it is called a scholarship. A student who is enrolled outside a degree program generally owes tax on the whole scholarship.
Taxable scholarship money is reported on the student's own tax return. Whether you need to file depends on your total income and filing status, using thresholds the IRS publishes each year.
Scholarship money used for housing, food, travel, optional equipment and other living costs is generally taxable income.
Records and forms
Colleges send Form 1098-T early in the year, showing tuition payments and the scholarships and grants the college handled. The form leaves out how you spent outside money paid to you directly, so keep receipts and the sponsor's award letters.
Scholarship money also interacts with education tax credits, because the same expense cannot be counted twice. Publication 970 explains when scholarship money may be treated as paying for living costs instead of tuition, which can change the credit a family claims. Because these rules turn on each family's situation, the IRS website or a tax professional can confirm how they apply to you.
Steps to take this week
- Gather every award letter from the past year
- Sort each award by what it paid for
- Keep receipts for required books and supplies
- Read IRS Publication 970 or ask a tax professional
Who decides
The IRS or a tax professional
A scholarship is generally tax-free when it pays tuition and required course costs, and generally taxable when it pays for living costs or work.
