The two conditions
Publication 970 says a scholarship or fellowship grant is tax free only if two things are true:
- You are a candidate for a degree at an eligible educational institution, one whose primary function is formal instruction. If you are not a degree candidate, the entire amount is taxable.
- The money pays qualified education expenses. It is tax free only up to those expenses, only if it is not earmarked for something else such as room and board, and only if it is not payment for services.
The word scholarship on the award letter does not settle anything. What counts is what the money is used for and whether you must work for it.
What counts and what does not
| Expense | Paid by scholarship |
|---|---|
| Tuition and fees required to enroll or attend | Tax free |
| Fees, books, supplies and equipment required of all students in the course | Tax free |
| Room and board | Taxable |
| Travel | Taxable |
| Research and clerical help | Taxable |
| Equipment not required for enrollment or attendance | Taxable |
| Pay for teaching, research or other required services | Taxable, with narrow exceptions |
The test for course materials is that they are required of all students in the course. Equipment the course requires of every student qualifies; an upgrade or an extra item you chose for yourself does not.
Terms matter in the other direction too. An award that is earmarked for housing, such as a grant the sponsor says is for room and board, is taxable even if you also have unpaid tuition, because Publication 970 excludes amounts designated for other purposes. When an award may be used for any college cost, the split follows what you actually spend it on, so keep the tuition statement, the receipts for required books and the award letter together with your tax records.
Three students, worked through
Each example assumes a degree candidate and an award that may be used for any college cost. The tax-free part is capped at tuition, required fees and required course materials; the rest is taxable, and so is any amount paid for services.
| Student | Award | Qualified expenses | For services | Taxable |
|---|---|---|---|---|
| Ana | $20,000 | $15,200 | $0 | $4,800 |
| Ben | $12,000 | $15,900 | $0 | $0 |
| Cleo | $18,000 | $11,600 | $5,000 | $6,400 |
- Ana gets $20,000. Tuition and fees are $14,000 and required books $1,200, so $15,200 is tax free. The remaining $4,800 went to the dorm and meal plan, which cost $6,800, and is taxable income.
- Ben gets $12,000 against $15,900 of tuition and required books. The award is smaller than the qualified expenses, so all of it is tax free and nothing is reported.
- Cleo gets $18,000, of which $5,000 is tied to working as a teaching assistant. That part is pay for services and taxable no matter what it is spent on. The other $13,000 covers $11,600 of qualified expenses, leaving $1,400 more taxable, $6,400 in total.
Publication 970 has its own short example: a $2,500 grant that requires part-time teaching, where $1,000 is payment for the teaching. Even if qualified expenses are at least $1,500, at most $1,500 can be excluded, and the $1,000 is taxable.
Grants that pay for work
Teaching and research assistantships, and grants that require future service, are taxed as pay. Publication 970 gives the case of a medical school scholarship that requires later service with a substantial penalty if you do not serve: the whole grant is taxable in the year you receive it. Tax Topic 421 lists three exceptions where payments for services are not included in income: the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, and a comprehensive student work-learning-service program at a work college.
Where the taxable part goes
Tax Topic 421 gives two routes on Form 1040 or 1040-SR:
- The amount is in box 1 of a Form W-2, typical for assistantship pay: it is already part of the wages on line 1a.
- It is not on a W-2, typical for the room-and-board part of a scholarship: report it on line 8 of Schedule 1 and attach the schedule.
Students who file Form 1040-NR and claim a treaty exemption follow separate lines described on the same page. A student whose only income is a small taxable scholarship may still owe nothing if total income stays below the standard deduction; the guide to whether students have to file taxes covers the filing thresholds, and the income tax calculator estimates the federal tax on a given income.
When including a scholarship lowers your tax
Expenses paid with tax-free scholarship money cannot also count toward an education credit. Publication 970 says it may therefore benefit you to choose to include an otherwise tax-free scholarship in income, so that more of your own spending qualifies for the credit. This works only if the scholarship terms allow the money to be used for non-qualified costs such as room and board.
Its worked example follows a student, Bill, with a $5,600 scholarship that may be used for any educational expenses, including room and board. Treated as fully tax free, the scholarship uses up his qualified expenses, he gets no credit, and his tax after credits is $2,585. If he includes $4,000 of it in income, as if it paid room and board, his income rises but he qualifies for the full $2,500 American opportunity credit, and his tax after credits drops to $565, a difference of $2,020.
The guide to the American opportunity and lifetime learning credits compares the two credits, and Form 1098-T explained shows where the school reports tuition and scholarships. If loans cover the rest of the bill, the student loan calculator shows the monthly payment after graduation.
This page summarizes the federal rules for general information; state treatment and your own situation can differ.
Frequently asked questions
Is scholarship money taxable?
Only part of it can be. For a degree candidate, a scholarship is tax free to the extent it pays for tuition and required fees, plus books, supplies and equipment required for the courses. Money used for room and board, travel or optional equipment is taxable, and so is any part that pays you for teaching, research or other required services.
Is a scholarship used for room and board taxable?
Yes. IRS Tax Topic 421 lists room and board, travel and optional equipment as incidental expenses that must be included in income. A scholarship that covers tuition and housing is therefore partly tax free and partly taxable.
Do I pay tax on a scholarship if I am not working toward a degree?
Yes. Publication 970 says a scholarship is tax free only if you are a candidate for a degree at an eligible educational institution. If you are not a degree candidate, the entire amount is taxable income.
Where do I report the taxable part?
If the taxable amount was included in box 1 of a Form W-2, it is already part of the wages on Form 1040, line 1a. If not, Tax Topic 421 says to report it on line 8 of Schedule 1 (Form 1040) and attach the schedule.
Can it help to treat part of a scholarship as taxable?
Sometimes. Publication 970 says it may benefit you to include otherwise tax-free scholarship money in income, because the expenses it would have covered can then count toward an education credit. This works only when the scholarship terms allow it to be used for non-qualified costs such as room and board.
Sources
- IRS Tax Topic 421, Scholarships, fellowship grants and other grants (degree candidate; tuition, required fees, books, supplies and equipment tax free; room and board, travel and optional equipment taxable; payments for services; the NHSC, Armed Forces and work-college exceptions; reporting on Form 1040 line 1a or Schedule 1 line 8)
- IRS Publication 970, Tax Benefits for Education, chapter 1 (degree candidates only; qualified education expenses; expenses that do not qualify including room and board, travel, research and clerical help; the $2,500 grant example with $1,000 for teaching; including a scholarship in income may increase an education credit)
- IRS Publication 970, chapter 2 (the Bill examples: a $5,600 scholarship usable for room and board, $4,000 included in income, a $2,500 American opportunity credit, tax after credits of $565 instead of $2,585)
General information based on the sources above, not tax, legal or financial advice.