If you've won a scholarship, grant or fellowship, congratulations are in order! You'll surely want to share the great news with Mom, Dad, Grandma...and
Why? Because, your scholarship, grant or fellowship may count as income and, if so, that means that it's taxable.
It's important to find out if your award is taxable and, if so, figure out how to correctly report it when filing your annual tax return.
We've compiled a guide to help you decipher which category your educational award falls under - taxable or tax-free.
Additionally, if your award is taxable, we've included instructions in order to help you figure out how to claim it on your taxes.
Tax-Free Scholarships, Fellowships & Grants
A scholarship is tax-free if:
• You are a full-time or part-time candidate for a degree at a primary, secondary or accredited post-secondary institution.
• The award covers tuition and fees to enroll in or attend an educational institution.
• The award covers fees, books, supplies and equipment required for your courses.
The award is tax-free only as long as you use it for the purposes outlined above.
Taxable Scholarships, Fellowships & Grants
Your scholarship is taxed if it was used to cover any of the following:
• Room and board
• Clerical help
• Fees, Books, Supplies and Equipment (Not required for the course or attendance)
If your award covered both tuition and room and board, the amount you use for tuition is tax-free. However, the amount you used for room and board is taxable. Remember, if you need to make this adjustment, you may have to adjust other parts of your return as well.
For example, if you are filing a deduction for educational expenses, you must reduce the amount of your deduction by the tax-free amount of the award.
Items that are required for your course or for course attendance are generally not taxable.
Finding the Right Form
When it comes to taxes, if you're not savvy about it, finding the right government form can be a challenge in itself!
Which is no longer an issue, because the only forms you need to think about in terms of claiming scholarships, grants and fellowships are the following:
- U.S. Individual Income Tax Return
- U.S. Individual Income Tax Return
- Income Tax Return for Single and Joint Filers With No Dependents
- U.S. Nonresident Alien Income Tax Return
- U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents
Making It Legal: Reporting Taxable Awards
If your only income is a tax-free scholarship or fellowship, you're in the clear. You don't have to file a tax return or report the award. However, if all or part of your scholarship is taxable and if that money is not recorded on your W2 form, you must report it.
To help you figure out the exact amounts that should be reported as taxable and non-taxable of your award, check out the IRS site section on tax benefits for education, where they have implemented an interactive tool to discover whether you're eligible to claim an education credit
In order to help save time, we've compiled information included within the packet for you. However, if you have additional questions, we suggest you refer to the IRS site before any panic attacks ensue.
: Any tuition reduction that is taxable should be included as wages on your W-2 form.
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 you're not sure if your award is taxable, ask the organization that sponsored the award. They may have information from the IRS regarding your award's tax status.
If you have questions, ask as soon as possible to get your answers before the end of tax season, when they are likely swamped with questions.You can also seek information directly from the Internal Revenue Service. Find help understanding education benefits and taxes on the IRS web site detailing ways to contact your local IRS office with questions
Or, find your own answers by checking out the IRS Tax Benefits for Education
, which covers information on education tax benefits.