Do scholarships count as income; are they taxable, or tax-free? This article will help you reconcile this little confusion across different scholarships, and understand whether or not they are taxable or tax-free.
In most cases, students studying at a college, university, or other recognized educational institution can avoid paying taxes on at least a portion of their scholarship funds. In general, you do not have to pay taxes on the scholarship money that will be used to cover the basic costs of your studies. The IRS calls these “qualified education costs or expenses”.
This means that you are unlikely to need to count these scholarships as income or pay tax on them if your scholarships are used to access courses or for special materials that your course of study
How to Find Scholarships That Are Tax-free and do not Count as Income.
Scholarships that are not taxable and do not count as income can be found everywhere. Whether a scholarship is taxable or not depends heavily on what type of student you are and where you want to spend the money. But first, you need to know how to look for scholarships in general before you determine whether your scholarship is tax-free or not.
To start your scholarship search, go to Stay Informed Group, including other scholarship search engines, you will see a list of the scholarships you can apply for. These should be scholarships that you have seen and that you are eligible for.
Aside from the scholarship search engines, you can ask your guidance counselor or college financial aid administrators about scholarship opportunities. You will receive inside information on tax-free scholarships from local institutions and organizations.
Also Read: How do Scholarships work?
How to Know if my scholarship does not count as income and tax-free
There are ways to determine whether a scholarship is tax-free or not before applying. First, there are general rules for tax-free scholarships or educational items that are not taxable with a scholarship.
In general, a scholarship is tax-free if you are a full-time or part-time candidate for a degree from a recognized university. They are also considered tax-free if they cover tuition fees, books, accessories, and course material.
However, there are educational fees that are taxable. This includes accommodation and meals, travel, research, administrative support and fees, books, and accessories that are not required for your course of study. For example, if you win a scholarship for tuition, room, and board, you do not have to pay taxes for tuition fees, but the room and board are taxable.
Winning a scholarship that is not tax-free should not be seen as a fine against you. The taxes you have to pay are minimal, especially for the amount that is used to pay for the education. Don’t avoid asking about scholarships that may be taxable and applying for them. Consider any money that you get for free to pay for your education as a worthwhile investment
Also Read: How to get scholarships for Studying Abroad
Scholarships that are considered taxable income
Suppose your daughter is a grad student having a scholarship for which she must be a teaching assistant. In this case, the tax regulations are different. This is because fellowships or scholarships that provide compensation are count as income and are taxable regardless of how the money is used. Even if a $20,000 fellowship for teaching assistants were used primarily for tuition and books, that $20,000 scholarship or fellowship would still be considered taxable income. The student stands to get a W-2 from the academic institution and should file a tax return.
These IRS regulations apply to scholarships, grants, and fellowships, including Pell grants that are need-based that are funded by the government. However, there are exceptions.
For example, payments that were made through the GI Bill are not considered to be scholarships that count as income or taxable income. Students who are participating in the Armed Forces Health Professions Scholarship or the National Health Service Corps Scholarship Program and Financial Assistance Program generally do not pay taxes on their financial support for eligible educational expenditures. Student loans are of course never taxable as they are not normal scholarships, and are not considered income and must be paid back.
And to be very clear, scholarships that are awarded to students who are not participating in a study program are always taxable
Also Read: Expert scholarship advice
How to register tax credits for education
Education tax credits that reduce the amount of income tax you pay directly could be another way to offset a part of your child’s eligible university expenses based on her own income. There are two possible credits:
American Opportunities Tax Credit (AOTC)
This credit offers a maximum yearly credit of $ 2,500 per student for four years of college. To be eligible for full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($ 160,000 or less for joint marriage declarations). The tax credit for taxpayers whose income is above these levels is being phased out.
Lifelong Learning Credit (LLC)
This credit offers a maximum of $ 2,000 each year per tax return, and not per student, but can be used for undergraduate studies, graduate studies, or professional courses with no limitation on the number of years. Income limits are lower: in 2019, the MAGI for individuals must be $ 68,000 or less ($ 136,000 or less for joint marriage declarations).
If you are eligible for both credits, you must choose one or the other. You cannot use both.
Can I use scholarship money to pay off loans?
Most scholarships that counts as income have a specific purpose, this includes tax-free scholarships. You usually can’t use the money for any other reason. Therefore, you could not convert them into cash and use them to repay your student loans. However, you may be eligible for a student loan forgiveness and can use this program to repay your loan.
How to Win a Scholarship that is Tax-Free
You can strategically search for scholarships that do not count as income, which are tax-free. First, ask for financial aids that cover tax-free education costs such as tuition, fees, and supplies. This way you can be sure that your scholarship is not taxable. In addition, when applying for a scholarship, it is always acceptable to contact scholarship holders to ask them questions such as: “Is this scholarship tax-free?” The more you know about your application, the better you can plan and allocate money if you really win.
Second, act strategically when looking for scholarships as a whole. Winning scholarships is a numbers game: the more you apply, the better your chances of winning.
Don’t just apply for these large scholarships that may or may not count as income, where you are simply asked to enter their contact details. Use part of your time to apply for the smaller scholarships, even local grants. The pool of these prizes is usually smaller, which would increase your chances of winning.
When it comes to non-taxable scholarships, don’t be afraid of applications that may require a little more work. Scholarships with dissertation requirements or letters of recommendation also have smaller groups of applicants. Sometimes hard work literally pays off!