May 1st is the traditional deadline for undergraduate students to commit to their college of choice, which means tuition payments are not far behind. If you’re wondering if your child’s scholarships are taxable, here’s what you should know.
First, it’s important to understand how a scholarship is defined. Generally, a scholarship is an amount paid or allowed to a student at an educational institution for the purpose of study. It can include both merit and need-based institutional aid. Other types of grants include need-based grants (such as Pell Grants or state grants) and Fulbright grants. A fellowship grant is generally an amount paid or allowed to an individual for the purpose of study or research.
Fulbright grants may be either scholarship/fellowship income or compensation for personal services, which is usually considered wages. If you are a U.S. citizen recipient of a Fulbright grant, you must determine which category of income your grant falls into in order to know how the grant is taxed for U.S. Federal Income tax purposes.
If you receive a scholarship, a fellowship grant, or other grant, all or part of the amounts you receive may be tax-free. Scholarships, fellowship grants, and other grants are tax-free if you meet the following conditions:
- You’re a candidate for a degree at an educational institution that maintains a 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; and
- The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution or for fees, books, supplies, and equipment required for courses at the educational institution.
You must include in gross income:
- Amounts used for incidental expenses, such as room and board, travel, student health insurance, and optional equipment.
- Amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant. However, you don’t need to include in gross income any amounts you receive 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.
Emergency financial aid grants under the Coronavirus Aid, Relief, and Economic Security Act, the COVID Relief Act, and the American Rescue Plan Act of 2021 for unexpected expenses, unmet financial need, or expenses related to the disruption of campus operations on account of the COVID-19 pandemic, are not includible in gross income.
Reporting a Taxable Scholarship on Your Tax Return
Generally, you report any portion of a scholarship, a fellowship grant, or other grants that you must include in gross income as follows:
- If filing Form 1040 or Form 1040-SR, include the taxable portion in the total amount reported on the “Wages, salaries, tips” line of your tax return. If the taxable amount wasn’t reported on Form W-2, enter “SCH” along with the taxable amount in the space to the left of the “Wages, salaries, tips” line.
- If filing Form 1040-NR, report the taxable amount on the “Scholarship and fellowship grants” line.
Estimated Tax Payments May Be Due
If any part of your scholarship or fellowship grant is taxable, you may have to make estimated tax payments on the additional income. For additional information on estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax, and Am I Required to Make Estimated Tax Payments? For more information about estimated taxes, see our article about Estimated Tax Payments: The Facts.
If you have any questions about whether your college student’s scholarships are taxable, please call us.