Earning a scholarship is a significant achievement and can be one of the best ways to lower the cost of college. What’s more, most scholarships are not considered taxable income, so that free money shouldn’t affect you come tax season. With that in mind, it’s important to be aware of how scholarships, grants and fellowships could potentially impact your tax returns.
Scholarships that aren’t taxable
While always best to confirm with a financial advisor or certified tax professional, Sallie Mae manager of corporate communications Ashley Boucher says that students can rest assured that scholarships aren’t considered taxable if used on qualified education expenses: “This includes tuition, student fees and textbooks.”
Your scholarship is tax-free if you:
- Are actively earning a degree and are regularly attending classes.
- Attend an educational institution that maintains a regular faculty and curriculum.
- Attend an educational institution that has a regularly enrolled body of students in attendance at the place where it carries on educational activities.
- Use the scholarship for tuition, fees or expenses required for your education.
Scholarships that are taxable
There are a few circumstances where scholarships could be considered taxable income. “An example would be if scholarship money was used to pay for rent, board, utilities or other school supplies not listed in your syllabus,” says Boucher.
Money received as payment for services required for receiving the fellowship, scholarship or grant would also be considered taxable. The exception to this is any payment for teaching, research or other services under the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program or an eligible student work-learning-service program.
How to report a taxable scholarship
If you’re reporting a taxable scholarship — whether because you received payment for services or because you used the money for a nonqualified expense like room and board — you’ll typically receive a W-2 form and will report it as taxable income on the “wages, salaries, tips” line of Form 1040.
However, you’ll need to report this income even if you don’t receive a W-2. If you don’t have this document, you’ll enter “SCH” and the taxable amount on the dotted line beside the “wages, salaries, tips” line of Form 1040.
Other education tax credits and deductions
Students who are paying for college have additional benefits during tax season, including the option to apply for the American Opportunity Tax Credit, the Lifetime Learning Credit and the student loan interest deduction. Here’s what you need to know about each program:
- American Opportunity Tax Credit (AOTC): This allows students to claim an annual maximum credit of $2,500 for the first four years of their higher education if they meet the requirements. To get the full credit, they must meet a specific modified adjusted gross income (MAGI) requirement of $80,000 or less ($160,000 or less if married filing jointly). Credits are phased out for MAGIs of $80,000 to $90,000 ($160,000 to $180,000 for joint filers).
- Lifetime Learning Credit (LLC): This credit allows students to claim 20 percent of the first $10,000 of qualified education expenses per year (with a maximum credit of $2,000). This can apply to students of all levels; undergraduate, graduate and professional degrees can qualify, with no time restriction. To receive the full credit, borrowers’ MAGI must be below $59,000 for single filers and $118,000 for married filing jointly. The amount is phased out for borrowers with a MAGI between $59,000 and $69,000 ($118,000 and $138,000 for joint filers).
- Student loan interest deduction: Students who used student loans to pay for school-related expenses may be eligible to deduct up to $2,500 in student loan interest paid during the previous year. To get the maximum amount, borrowers must have a MAGI below $70,000 for single filers and $140,000 for married filing jointly. Amounts are phased out for borrowers with a MAGI between $70,000 and $85,000 ($140,000 and $170,000 for joint filers).