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Are Scholarships Taxable Income?

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Scholarship grants provide access to education, a pool of resources and a wider network, thereby changing the lives of the grantees. Some of the broader advantages of scholarships can be aimed at transforming institutions, industries and communities.

Here, our concern is – are scholarships taxable income? If yes, which scholarships are tax-deductible? And if no, what are the conditions that need to be met for scholarships to be tax-free.

Are Scholarships Taxable Income?

Though most scholarships available are not taxable income, some scholarships may be regarded as taxable. Generally, scholarship money is tax free provided the student is a candidate at an eligible institution, and the money is used to settle qualifies expenses. Some of the students who are applied for a given scholarship into higher institution are of the opinion that scholarship are taxable income hence the reason why many students fear to apply for scholarship, thus this brings us to the question are scholarship taxable income. 

Scholarships are completely tax free if all the money is used for qualified education expenses. For instance if your son received a scholarship of $40,000 and tuition fee was $50,000 he won’t owe any task on the money. However, if his scholarship was $55,000 and $5,000 went for board and room, that $5,000 would be considered taxable income. Scholarships awarded to students who are not in a degree program are always taxable hence the reason I said not all scholarship are totally free, as it depends on how money from the scholarship is been used.

So while scholarships are mostly tax free, they can also be taxed if the money from the scholarship is not used for qualified educational expenses. Hence the need for scholarship applicants to make research on the scholarship program they want to apply for and understand the terms and conditions on which a scholarship remains tax free.

Are Scholarships Tax Deductible?

Are scholarships tax deductible? For individuals, no. Are scholarships tax deductible for donors, definitely yes.

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Personal scholarships or scholarships awarded to other individuals or group of individuals related to self are not tax deductible. However, scholarship funds and other grants that are awarded on “objective or nondiscriminatory basis” are tax deductible, only for the donors.

What this simply means is that, scholarships giving to individual students are not taxable, not minding whether it is a taxable gift or not. When the scholarship is awarded from a charitable organization including the institution the student is attending, then IRS will consider that as a taxable income for the student. The only exception to this latter rule is when the said scholarship amount is used for such things as paying for tuition or covering supplies such as textbooks and other equipment the student requires or connected to the student’s degree program.

As the case may be, the students need a proof of spending the scholarship amount on these approved uses.

Is Scholarship earned income?

When the student is offering any service to the institution such as teaching assistant jobs, such payments are considered as employment income regardless of how the student uses the payment. In this case, such incomes are tax deductible.

How to Report Scholarship Income

This is how to report scholarship income. When filling Form 1040 or Form 1040-SR, students are to include the taxable portion in the space provided for wages, salaries and tips section of the student’s tax return.

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