Should I Claim my Scholarships or Fellowships on My Taxes?

Congratulations on receiving a scholarship, grant, or fellowship! These benefits are a fantastic way to cut down on the rising costs of college education. While you are celebrating, you should also keep in mind that you may actually need to pay taxes on your new-found source of funds to attend school, but not everyone needs to do this. How can you tell if you are one of those that will be taxed?

Scholarships and Taxes

When you receive a scholarship or fellowship, you are essentially receiving money or tuition as a gift from someone else, whether it is merit-based or for some other reason. It usually for either tuition, living expenses while attending school, or to use on research. 

Some of these scholarships or fellowships may be tax free, but others can be taxable. How yours is treated will depend on your individual tax situation. The best way to find out whether your scholarship or fellowship will be taxed is to speak with an experienced tax professional like those at Kaufmann Advisors. We can help you decide whether your scholarship or fellowship will be taxed long before tax time so you do not have any unpleasant surprises when you file your taxes.

Are My Scholarships or Fellowships Tax Free?

You must meet two conditions for your scholarships or fellowships to be tax free. If you do not meet this conditions, the money from your scholarship or fellowship will be added to your income, and it will be taxed just as if you earned it by working at a regular job. The criteria for tax free scholarships or fellowships include:

• You are currently enrolled in post-secondary school (most colleges qualify), and you are seeking a degree.
• The amounts you received have been used to pay for tuition, books, or required attendance fees. Equipment and other required supplies also qualify.

If any portion of your scholarship or fellowship exceeds the expenses listed above, then just that portion of the scholarship may be taxable.

When Are Scholarships or Fellowships Taxable?

If you received a scholarship or fellowship that covers more than those expenses listed above, including room and board or other living expenses, then it is likely going to be taxable as regular income. If you received money for researching, teaching, or other services, then your fellowship or scholarship is likely to be taxable as well. Fellowships are more likely to be taxable than scholarships as a general rule.

There are some exceptions for certain types of scholarships, however, particularly those that are awarded by the military or other government fund. Your tax preparer can help you decide whether your scholarship should be taxable.

How to Report My Scholarship, Fellowship, or Grant

Sometimes the taxable portion of a scholarship, fellowship, or grant is reported to you on a W-2. If it is, you can enter it just like you would for regular income. If it is not, then you should include the notation “SCH” next to where you report your taxable income. That way, the IRS will know that you received a scholarship, but you did not receive a W-2 related to that scholarship. The IRS will also stop looking for records of an actual job if you make this notation as well.

Specific Types of Educational Assistance

Some types of scholarships or fellowships have special tax treatment. A sample of these are listed below:

• Pell Grants and Other Need-based Educational Grants (Title IV): These grants are treated just like a scholarship for tax purposes. The only taxable amount is that amount that exceeds your qualifying education expenses.
• Fulbright Grants: These grants are treated just like scholarships, and they are usually tax free.
• Payment to Service Academy Cadets: When you are appointed to a United States military academy, it is not considered a fellowship or scholarship. Any payment that you receive should be reported on a W-2, and it is considered regular income. There are, however, some exceptions to this rule, and your tax professional can walk you through those exceptions if needed.
• Veterans’ Benefits: Payments that you receive for training, education, or other items as a veteran are tax free. These payments should not be included on your tax return. Veterans may also qualify for additional education tax benefits as well, so find a tax preparer that is knowledgeable in this area to provide advice about these benefits.
• Qualified Tuition Reduction: This benefit is technically not considered a scholarship, grant, or fellowship. The educational institution itself will usually provide this benefit, and there are some special rules for this type of situation as well. If one institution sends you to another school to take classes, those benefits may be tax free as well.

Find a tax preparer that can help you with the ins and outs of scholarships and fellowships like those at Kaufmann Advisors. Use the Contact button below to get started or click the profile link to find out more about us.