May 1 is the traditional deadline for undergraduate students to commit to their college of choice, which means tuition payments are not far behind. If you are wondering if your child's scholarships are taxable, here is what you should know.
What Is a "Scholarship?"
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 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 income category your grant falls into to know how the grant is taxed for U.S. Federal Income tax purposes.
Tax-Free vs. Taxable
If your child receives a scholarship, a fellowship grant, or other grant, all or part of the amounts received may be tax-free if your child meets certain conditions.
Scholarships, fellowship grants, and other grants are tax-free if:
- The student is 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 the student receives 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.
However, the student 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, students do not need to include in gross income any 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.
Reporting a Taxable Scholarship on Your Tax Return
Generally, a student reports any portion of a scholarship, a fellowship grant, or other grants that must be included 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 the student’s tax return. If the taxable amount was not 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 a scholarship or fellowship grant is taxable, the student may have to make estimated tax payments on the additional income. For information on estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.
If you have any questions about whether your college student's scholarships are taxable, please call.