The Big Questions About Scholarship Taxability
By Matt Konrad
Updated March 2021
Throughout the 2020-21 school year, thousands of students and families have dealt with new circumstances and changed plans. Virtual campuses, closures, transferring or taking a gap year can all have an effect on student financial situations—and, in some cases, may have unexpected tax implications. Here are some of the most pressing questions we’ve heard regarding scholarships and taxation right now.
Do college students have to file tax returns?
If a student’s taxable income exceeds $12,400, they are required to file a tax return – even if their parents still claim them as a dependent. If a student’s taxable income is less than that threshold, it can still be a good idea to file – they may be eligible for a refund of federal taxes withheld by their employer, or may qualify for the Earned Income Tax Credit.
Is my private scholarship taxable?
In general, scholarship funds cannot be treated as taxable income as long as you’re (a) pursuing a degree and (b) using the funds for tuition, fees or anything else that the IRS considers a “qualified education expense.” Those include books and supplies that are required for your program of study.
However, if you’re using all or part of your scholarship funds to cover room and board, travel, tutoring services or optional supplies, that money will be treated as taxable income. Since private scholarships are often more lenient about how funds can be used, it’s important to know in advance that you might face tax penalties if you’re using private scholarship funds to pay for extra living expenses, technology or travel costs.
Here’s more on scholarship taxability from TaxSlayer, including a guide to the necessary IRS forms and worksheets. Keep reading for our tips on reducing your potential tax burden.
Do I have to pay taxes on COVID-19 relief funds?
Federal COVID-19 relief has come in a few different forms; the most relevant for students are emergency grants via the CARES Act, and direct stimulus payments.
So far, all the news about COVID-19 emergency aid, distributed through colleges, has been good. The IRS has confirmed that:
“Emergency financial aid grants under the CARES Act for unexpected expenses, unmet financial need, or expenses related to the disruption of campus operations on account of the COVID-19 pandemic, such as unexpected expenses for food, housing, course materials, technology, health care, or childcare, are qualified disaster relief payments under section 139 of the Internal Revenue Code. This grant is not includible in your gross income.”
One of the key phrases there is “qualified disaster relief payment”—this is a broad category of federal assistance that helps people recover in the face of natural disasters, and part of its legal definition is that it is not considered taxable income. When the federal government declared a state of emergency related to COVID-19, it meant that these payments would be non-taxable.
If you or your college plans have been impacted by COVID-19 and you’ve received federal funds via your college, you will not be taxed on those funds. However, if you’ve received emergency aid funds in the form of a grant or scholarship from your state or a private provider, the tax rules outlined above may apply. As always: be aware of tax implications when you receive your funds, and avoid surprises later.
Direct stimulus payments — the “stimulus checks” that have been in the news for months — are also treated as non-taxable income; note that students who can be claimed as dependents have not been eligible for these payments, but independent students have been.
Has anything changed for students due to the new stimulus package?
President Biden signed the American Rescue Plan Act into law on Thursday, March 11, 2021. The new law includes $40 billion for colleges and universities, where half of the aid must go directly to students via emergency financial aid grants (emergency grants). As specified above, these grants are not taxable.
Additionally, all student loans forgiven by December 31, 2025 will not be taxed. The tax-free status is also extended to employer provided student loan repayment assistance programs. Previously, employers were able to provide up to $5,250 of tax-free aid to assist employees with student loan payments. The $5,250 cap has been lifted and employers can now provide student loan repayment assistance without limitations until December 31, 2025.
Are postgrad scholarships or teaching stipends subject to income tax?
Regardless of the campus situation, graduate student funding tends to be more of a gray area in terms of taxation. The same basic rule applies—scholarship funds used for tuition or required supplies are not taxable—but teaching stipends and fellowships can come with their own tax burdens.
Intuit, makers of TurboTax, offer a useful example:
In some cases, a scholarship is really more of a stipend, providing compensation for services while you’re in school or for services you’ll provide in the future. If, for example:
You receive a $5,000 scholarship with $1,500 of it designated to pay for your teaching services.
The $1,500 counts toward your taxable income for the year.
If you receive a scholarship with the condition that you provide services in the future, you’ll need to count the scholarship as income in the year you receive it. Payment for services at a military academy also count toward your taxable income.
This is obviously contingent on how your funding is structured, so it’s important to talk with your financial aid office before committing to an offer. (The same is true for any work-study funds, but teaching stipends are most likely to be bundled together with nontaxable scholarship funding.)
Postgraduate fellowships fall into a similar category, as you can hear in this episode of the Personal Finance for PhDs podcast. Since these funds are often used for living or traveling expenses, they’re among the most likely type of financial aid to be taxed—especially if you’re receiving them for a discrete research project rather than part of a degree program.
What do I need to know about the taxability of my scholarships or grants?
In addition to staying aware, it is also important to keep track of your scholarships and grants. For example, did it cover tuition and fees or other expenses, and what semester was it applied to?
Typically, at the end of January, your campus should issue a summary (Form 1098-T) of what financial aid was applied to your tuition, and, a total of all scholarships and grants received on your behalf. If you do not receive this document through your financial aid portal, via email or mail, please contact your financial aid office. You can share all of this information with your tax preparer; if you or your family don’t have a tax preparer you may qualify to work with one free through the IRS Volunteer Income Tax Assistance Program.
If you receive private scholarships that can be used for living expenses, let your college financial aid office know. You can talk with your financial aid advisor about deferring part or all of your scholarship to a year when your taxable income may be lower.
Finally, you and your family may also want to explore putting funds into your state’s 529 college savings plan. Setting this up may require a professional financial adviser, but 529 funds also avoid some of the tax penalties that can affect scholarships.
For more on scholarship taxation, and what Scholarship America is doing to address the issue, check out this post. To help you figure out the taxability of your scholarships or emergency grants, consult our infographic.