If you’re sending your child off to college, you’re looking for any way you can save money. When your child qualifies for a scholarship, it’s a cause for celebration! Just be aware of the possible tax ramifications so you don’t run afoul of the rules.
Scholarships, fellowship grants, and other grants that cover “qualified expenses” – tuition and fees, books, and related costs like supplies or equipment required for specific classes – are fully non-taxable. However, scholarships that cover room and board, travel, or research costs are subject to tax. If part of the scholarship is applied to tuition while the rest goes to nonqualified expenses, only the tuition amount is tax-exempt.
In addition, the student must be a degree candidate at an eligible educational institution – one with a regular faculty, curriculum, and enrolled body of students.
Also, the scholarship can’t be paid as wages for teaching or research. So if your child’s scholarship is dependent on working as a graduate teaching assistant, that scholarship is considered as taxable wages reportable on a Form W-2 at the end of the year.
If your student receives an athletic or performance scholarship, those are also tax exempt as long as they’re used for qualified expenses, even if the student ends up not participating in the scholarship activities.
The IRS has also said that tuition assistance through the GI Bill is not taxable, nor are amounts received for services that are required by the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, or a comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college.
Employees (or their family members) of an educational institution who receive tuition reductions or waivers don’t have to report those discounts as income, as long as the program doesn’t discriminate in favor of highly compensated employees.
If a scholarship does cover non-qualified expenses (such as room and board), be aware that it also might trigger “kiddie tax” liability. The kiddie tax applies to unearned income above $2,300 (2022) for a dependent child under age 19 or a full time student under age 24. The kiddie tax is taxed at the top rate of the child’s parents.
The scholarship rules can be confusing, so visit with us for further guidance in your situation. And check out IRS Publication 970, Tax Benefits for Education.