Scholarships are forms of free money that enable you to pay for college. While their coverage varies, most of them can help you pay for tuition, room and board and any other related education expenses. However, there are scenarios in which winning a scholarship may cost you.
Some scholarships are taxable – or they can be taxed depending on where you allocate the money. As you search for scholarships, you may be wondering, “How do I know if my scholarship is tax free?” Fortunately, we can help you identify which scholarships are taxable and how you can best strategize your scholarship winnings in order to get the most out of your money to pay for school.
How to Find Tax Free Scholarships
Tax free scholarships are everywhere. In fact, whether or not a scholarship is taxable depends a lot on what type of student you are as well as where you plan to spend the money. But first, you need to know how to search for scholarships in general before you determine if your scholarship is tax free.
To start your scholarship search, fill out a profile on Fastweb
. The process to create a profile is quick, easy and free. Once you have completed a profile, you will be matched to the scholarships for which you qualify in our database, which is comprised of over 1.5 million scholarships worth $3.4 billion.
Afterwards, you will see a list of scholarship matches. These are scholarships for which you specifically qualify. With our service, you don’t have to waste hours and hours finding the right scholarships for you; simply put, we do it. From there, it’s up to you to apply to the actual scholarships.
Outside of Fastweb, you can ask your guidance counselor or financial aid administrators at the college about scholarship opportunities. They will have the inside scoop on tax free scholarships from institutions and local organizations.
How to See if My Scholarship is Tax Free
There are ways to determine whether or not a scholarship is tax free before you apply. First, there are general rules about which scholarships are tax free or which education related items are tax free with a scholarship.
Generally, a scholarship is tax free if you are a full- or part-time candidate for a degree at accredited post-secondary institutions. They are also considered tax free if they cover tuition, fees, books, supplies and equipment for courses.
However, there are education costs that are not tax free. These include room and board, travel, research, clerical help, and fees, books and supplies that are not required for courses. If, for example, you win an award that covers tuition and room and board, you will not have to pay taxes on the tuition but you will on the room and board.
Winning a scholarship that is not tax free should not be viewed as a penalty against you. The taxes you’re required to pay will be minimal, especially for the amount you’re given to help pay for school. Do not shy away from applying for scholarships that could be taxed. Consider any money that you get for free to pay for school a worthy investment.
How to Win a Scholarship that is Tax Free
You can search strategically for scholarships that are tax free. First, apply to scholarships that cover tax free education related expenses, like tuition, fees and supplies. That’s how you will know for sure if your scholarship is tax free. Also, as you apply for scholarships, it is always acceptable to reach out to scholarship providers to ask questions like, “Is this scholarship tax free?” The more you know going into a scholarship application, the better you can plan and allocate money when you actually win.
Second, act strategically in your scholarship search as a whole. Winning scholarships is a numbers game: the more you apply to, the better your chances of actually winning. With that in mind, treat searching for scholarships like a part-time job. Commit to applying to two scholarships a week.
Don’t just apply to those large, sweepstakes-esque scholarships that only require you to fill in your contact information (but you should still apply to as many of those as possible!). Use some of your time to apply for smaller, even local awards. The pool for those awards is typically smaller, which would make your chances of winning actually greater.
When it comes to scholarships
that are tax free, don’t shy away from those applications that might require a little more work. Scholarships that have essay or letters of recommendation requirements also have smaller applicant pools. Sometimes, doing the hard work really pays off – literally!
How to Take Care of Scholarship Taxes
Once you know if your scholarship is tax free or taxable, you’ll be able to take action. Those with a tax free scholarship only have to report the amount to their school. Those with a taxable scholarship, on the other hand, must report it to the federal government.
Reporting your taxable scholarship is just like reporting income. You will need the correct W-2 form in order to report your scholarship. Here's a quick guide detailing how to report your scholarship, fellowship or grant income depending on which return form you are filing:
If you are filing a 1040EZ form:
If you file Form 1040EZ, include the taxable amount in the total on line 1. If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 1.
If you are filing a 1040 form:
If you file Form 1040, include the taxable amount in the total on line 7. If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 7.
If you are filing a 1040A form:
If you file Form 1040A, include the taxable amount in the total on line 7. If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 7.
If at any point during the scholarship search and winning process, you ask yourself, “How do I know if my scholarship is tax free
?,” contact the scholarship provider. They will be your best resource in getting the information you need to determine whether or not you’re treating your scholarship correctly. Not reporting your scholarship could result in it being taken away. So do the right thing. Though you may have to pay taxes on your winnings, it’s better than taking decades to pay down student loan debt after college.