Payment of college tuition is usually stressful for a student. As a result, many students strive for scholarships and grants to offset the expense.
Winning a scholarship indeed calls for celebration. However, before you get carried away, you need to figure out some essential details, mainly the influence of taxes.
How do scholarships affect taxes?
High school students have no reason to worry about taxes. However, winning a scholarship changes the entire narration, and you need to know the effect of taxation on it.
First, you should know if such a scholarship is taxable. Should it be taxable, report it every time you file your tax return each year. You can access this tool from Uncle Sam to know if you will pass the tax on such an award or not.
As a general rule, you need not pay taxes on scholarships that cover education-related expenses. Uncle Sam classifies those as "qualified education expenses." As a result, fees, supplies, books and tuition qualify.
You need to be attending an accredited university as a full, or part-time student for your award to be classified as tax-free. Also, student loans or grants are not taxable income.
Are Grants and Scholarships Taxable Income?
All grants or scholarships you get for non-qualified expenses are classified as taxable income. As a result, expenses such as travel, board and room, and other fees are not compulsory by the school, and such expenses will be taxed.
Also, some other scholarships and grants are considered taxable income. As a result, someone who works while studying, like a teaching assistant job or any form of a stipend, is regarded as a job. As a result, all income from such will be taxed.
The tuition portion of your scholarship will not be taxed if your scholarship covers tuition alongside room and board. As a result, you need to report the money you paid for the room and board.
Report all taxable Income
You need not bother about filing a tax return or reporting your scholarship if it is tax-free. However, for any taxable scholarship which is not reported on W2, it is essential to report it.
Doing this personally might be confusing. As a result, here are some tips to help:
Complete all financial forms and statements you got through the year. Ensure you have all your documentation.
There are free versions of tax software that can help file your tax. You can also contact an accountant or tax professional.
Discuss with any financial aid officer in your school. Figuring out the tax forms personally can be complicated.
The 1098-T Form
You will likely receive Form 1098-T from your college when it is time to file. The Form will list the funds you have received from the grant and scholarships.
It is a one-page form that needs the tax information from your school, the tuition payment you got and billed, alongside the scholarships you won.
You will also see a list of tuition and qualified expenses. You will not see room and board since it is a non required expense that doesn't qualify. You can estimate the credit you are eligible to claim on your tax form with the info. The Form is essential when preparing tax, so keep it well.
Financial Aid and Tax Returns
When you know if your grants and scholarships are taxable income, ensure you report such info correctly on your tax return. Everyone with reportable income is mandated to file a tax return every year.
You, however, need not worry about filing and reporting your tax report if the full scholarship and grant you got are tax-free. However, should they be taxable, reporting it is compulsory.
Conclusion
Understanding the impact of grants and scholarships on your tax is essential. Not reporting a scholarship could get you into trouble with the IRS later. Be organized, keep your documents and file when it is time to file if you have to.
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