College has become an investment these days. Fortunately, many scholarships, grants and other financial aid are available. Additionally, your financial aid may be tax-free, depending on conditions.
Students earn scholarships to help with educational costs. Researchers are awarded fellowships to aid in research costs. Both may be generally tax-free if you are a candidate for a degree at an accredited institution. Check your school’s accreditation to determine if the scholarships they offer may be tax free.
There are some rules your scholarship or fellowship must follow to be tax-free:
1. It doesn’t exceed qualified educational expenses.
2. Not marked for other purposes that are not qualified educational expenses.
3. Doesn’t represent payment for teaching, research, or other reasons as a condition for the scholarship.
What are “qualified educational expenses”?
– Tuition and fees required to enroll at an eligible educational institution.
– Course-related expenses such as books, supplies, and equipment
The following are NOT considered qualified educational expenses:
– Room & board
– Travel
– Research
– Clerical help
– Equipment not required for courses at an eligible institution.
If your scholarship or fellowship does not meet the rules specified earlier, then it is considered taxable and will need to be included in your gross income on your Individual Income Tax Form. Let’s look at an example:
Based on her grades and SAT score, Michelle accepts a scholarship to attend Cal State Fullerton. The scholarship is worth $10,000 for the year. She uses $6,000 to pay for her registration and unit costs. $1,500 pays for her coursebooks. She also buys
lab materials for an additional $1,200. She uses the remaining $1,300 of her scholarship money to help pay rent with her roommates.
Her registration, coursebooks, and lab materials paid for by her scholarship are considered tax-free. They qualify based on the rules above. Unfortunately, rent is not tax free because it is ‘room & board’. She will have to include that $1,300 as part of her gross income.
Interested in learning more about how you can use educational expenses to help lower your own taxes? Follow us on our social media pages for future updates! Or if you have a specific question, feel free to contact us directly!