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Scholarships Are Usually Tax-Free, but There Are Exceptions

Ade Hennis - Author
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Aug. 10 2022, Published 7:14 a.m. ET

Scholarships can provide the financial support that families need for students attending college. Whether it’s a private or federal scholarship, the reward can be used for various college costs. However, many students entering college don’t have experience filing taxes. Are scholarships tax-free?

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In many cases, students don’t have to worry about having to file for taxes or having to pay taxes for their scholarships. But there are certain situations where a scholarship or grant holder will have to pay taxes.

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Are scholarships taxable?

Scholarships are tax free if you’re using the them them to pay for tuition, books, supplies, and equipment required for courses at the institution you’re attending. The IRS states that the institution must have “regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities."

Using the scholarship to pay for room, board, and travel is not tax free. This can be confusing because many schools tend to include room and board fees with general tuition. In the event that all the fees are tied into one whole tuition fee, talk to your school’s financial aid office to figure out how to use the scholarship effectively without having to pay taxes.

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If you take part in work study or some type of fellowship program, then the income earned from those programs are taxed. You don’t have to file taxes if you’re in a fellowship program such as the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship & Financial Assistance Program.

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If you’re a student who’s only doing work study and has no other job, it should be fairly easy to file your income earned, as the school will typically send you a W-2 form. And even though you have to file taxes for work study, if you use the work-study earnings to pay for education-related expenses, you should be eligible for the American Opportunity Tax Credit (AOTC).

The AOTC is a credit for eligible students who pay qualified education expenses, and the student can redeem the credit for each of their first four years of education. Students can earn up to $2,500, and the credit will be distributed in the form of a tax refund check.

How to report taxable scholarships

Students report scholarships, fellowship rewards, or any other type of grants in Form 1040 of their tax return. The taxable portion can be reported under the “wages, salaries, tips” line unless suggested otherwise. If you’re a foreign student who’s not a U.S. citizen and doesn’t have a green card, you’ll have to file Form 1040-NR (nonresident alien).

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