A major concern for most students while studying abroad is the financial aid requirements that can help fund their expenses. That is why scholarships to study abroad exist. With the help of scholarships, you can avail so many benefits like a reduction in your tuition fees, contribution towards your living and transportation costs, covering health insurance costs and so on. But the biggest question is that: Are college scholarships taxable? I could simply say that in general, you do not have to pay taxes if you are a degree candidate and the award is used to pay for tuition and required fees, books, supplies and equipment. However, there are some scholarship opportunities that are not tax exempt. So, are college grants taxable? Read along to take a closer look at each situation and check the eligibility for tax-free scholarships.
Before we proceed, refer to the chart below to see how students fund their academic years in college and how scholarships contribute towards their expenses.
Source: EducationData
As we can see from the above chart, about 79% of the students are dependent on grants and scholarships to fund their studies. The other major funding sources include:
- Income and savings – 75%
- Parent Contribution – 74%
- Student Loans – 61%
- Other Sources – 20%
When you ask the question: Are college scholarships taxable? – there’s rarely a simple yes or no answer. The good news is that scholarship money, for the most part, isn’t taxable because it isn’t considered as income. You still may be able to claim an education tax credit on your return as long as you pay qualified expenses above and beyond what your scholarship covers.
Will You Be Using All The Scholarship Money?
Let’s imagine a scenario so that you can understand when are college scholarships taxable and when they’re not. Suppose you receive a scholarship worth $10,000 but the qualified expenses at the school you want to attend only total $8,500. That $1,500 balance becomes taxable income to you.
Your entire scholarship would be tax-free if you were to receive $10,000 that’s tagged solely for tuition and fees, which would cost you $11,500 a year. Every dime of the scholarship would therefore go to qualified expenses, and you’ll have to come up with $1,500 out of pocket.
When Are Scholarships Tax-Free?
The Internal Revenue Service (IRS) is a federal agency responsible for the collection of taxes and enforcement of tax laws. If you’ve met the conditions set by IRS regarding the taxability of scholarships, you will understand when are college grants taxable income and when they’re not. Scholarships, fellowship grants, and other grants are tax-free if you meet the following conditions:
- You’re a candidate for a degree at an eligible educational institution which generally means an institution with a regular faculty and curriculum and a regularly enrolled body of students.
- The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses at the educational institution.
- Your scholarship should not include other college related expenses such as room, board and travel. The money does not represent wages for teaching or other work.
For example, if you have received a $10,000 scholarship and tuition was $15,000, you wouldn’t owe taxes on the money. However, if your scholarship was $20,000 and $5,000 went for room and board, that $5,000 would be considered taxable income.
Studying abroad especially for your postgraduate studies requires student finance. So ensure that you apply for the right kind of scholarships and make use of it.
When Are College Scholarships Taxable?
For a scholarship to be completely tax-free, all the money must be used for qualified expenses. So, that actual question is when are college scholarships taxable? Scholarships are considered taxable income when the amount is used or received for the following purposes:
- Amounts used for incidental expenses, such as room and board, travel, and optional equipment.
- Amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant.
Are College Scholarships Taxable Income: Exceptions
These IRS rules apply to scholarships (both merit and athletic), fellowships and grants— including government-sponsored, need-based grants. However, there are exceptions.
- Payments made through the GI Bill aren’t considered scholarships, nor are they considered taxable income.
- Students participating in the National Health Service Corps Scholarship Programme or the Armed Forces Health Professions Scholarship and Financial Assistance Programme also don’t generally pay taxes on their aid for qualified education expenses.
- A comprehensive student work-learning-service programme operated by a work college is not included as a part of your gross income.
Joining a university soon? Don’t forget to read about our tips to survive in a university.
Are College Scholarships Taxable: Deductions
A tax deduction reduces your taxable income. Unfortunately one of the two previous deductions, the tuition and fees deduction, expired after the 2017 tax year.
However, if you are paying interest on a student loan for your education, you may be eligible to deduct up to $2,500, provided your 2020 Modified Adjusted Gross Income is less than $85,000 ($170,000 if filing a joint return).
Thank you for reading the blog on Are College Scholarships Taxable. If you wish to know more about scholarships, we have a few blogs for you:
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I have done Bachelor’s in Culinary Arts from India and completed my graduation in the year 2022 .I am 22 years old. After graduation, I have done 1 year paid internship from USA .Now, I would like to take occupational experience and learn culinary skills and also do masters in Culinary arts.How can I find the college n best course / country where I can persue studying further