According to the Internal Revenue Service as of 2020, certain scholarships may or may not be taxable. This factor may impact your taxable gross income. Taxable scholarships fall under IRS Publication 970: Tax Benefits for Education. 

Are Scholarships Taxable or Tax Free?

The IRS rules apply to athletic, merit, and government needs based awards. Taxable scholarships may involve using funds toward unqualified expenses. You may also have taxable income when not attending an eligible education institution. 

You may also ask, “are scholarships taxable for certain expenses?” The IRS taxes scholarship funding used for incidental expenses such as room & board. They also tax money if the amount exceeds your qualified education expenses. Using funds for other undesignated purposes causes taxable scholarships. 

Wondering what scholarships are taxable? The IRS taxes scholarships used as payments for teaching, research, or other services. This rule applies even if the services are a condition of the scholarship. 

Yet required services by the Armed Forces Health Professionals Scholarship are not taxed. The National Health Service Corps Scholarship Program services are also not taxed. Work colleges with student work learning service programs do not qualify as taxable gross income.

Some scholarships are tax free if you meet Internal Revenue Service eligibility.  Under the IRS Topic No. 421, Scholarships, Fellowships and Grants, the 2021 updated eligibility requirements are:

  • You may not pay taxes if the award goes towards tuition, books, or supplies. Other fees for course requirements may not become taxed.
  • Students may need specific equipment to complete the degree course. Scholarship funding used for this related expense may not become taxed. 
  • The type of eligible educational institution may have tax free scholarships. If the school maintains regular faculty or curriculum, a scholarship becomes tax free. 
  • Also, you may not pay taxes if the college has a regular student body in attendance. The student body must convene where the college holds its educational activities.

Are Scholarships Tax Deductible for a Company? 

A company scholarship may or may be taxable. According to the Internal Revenue Service as of 2021, a scholarship is taxable if used to provide extra pay. It is also taxable for fringe benefits or incentives to employees. The scholarship is only tax free when meeting the requirements for individual grants.

How Do You Report Scholarships on Your Tax Return?

According to the IRS as of 2020, you may report scholarship funds on 1040 income tax forms. If you are filing a Form 1040 or Form 1040SR, place the taxable part under the “Wages, salaries” line. 

Write the letters “SCH” to the left of this column if the scholarship was not reported on a form W-2. You may also report the income on a Form 1040-NR. Log the amount under the “Scholarship and Fellowship Grants” column.

Do You Include Scholarships as Earned Income?

No. Taxable higher education scholarships fall under unearned income. You combine the amounts into your gross income. You only want to include the scholarship’s taxable part, such living expenses. The money used for tuition, fees, and books is tax free. Use Worksheet 1-1: Taxable Scholarship and Fellowship Grant form to calculate the amount.

Are There Tax Benefits or Tax Credits for Scholarships?

According to the IRS as of 2021, the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC) provides tax benefits. Both credits may also help offset your taxable income from student loans. 

The AOTC credit may help pay for qualified education expenses. The expenses may cover the first 4 years of higher education. Students may receive a $2,500 maximum annual tax credit. The student may also receive 40% refund of the remaining tax credit. The refund goes into effect if the credit brings their owed taxes to zero. Eligibility requirements include:

  • pursue a degree or recognized credential
  • no felony drug conviction at the end of the tax year
  • have not finished the first 4 years of higher education 
  • enrolled half time for at least one academic period at the beginning of the tax year
  • have not claimed the AOTC or Hope credit more than 4 tax years

As of 2021, the Lifetime Learning Credit also provides benefits according to the Internal Revenue Service. This credit may pay for qualified tuition and related expenses. The credit does not have a maximum year limit to claim it. A student may get up to $2,000 per their tax return. 

The credit goes to the person paying for the education for themselves or an eligible student. The payer may consist of the student, the person claiming the student as a dependent, or a third party. The payers also qualify when paying for education costs at an eligible institution. Eligibility requirements include:

  • enrolled at least one academic period at the beginning of the tax year
  • taking education course/courses for a degree or recognized credential
  • taking education courses to improve job skills
  • enrolled or taking courses at an eligible educational institution

Which Scholarships Are Not Taxable?

The National Health Service Corps Scholarship program is not taxable. The service rule of the program isn’t reported as federal tax. The Armed Forces Health Professions Scholarship and Financial Assistance Program is tax free. According to the U.S. Department of Veteran Affairs, GI Bill programs are also not taxed. These are not considered scholarships when used for education.

Other Important Tax Information

Is scholarship income taxable? Yes. Scholarship money may impact your income bracket. A taxpayer may pay more at the end of the year.  Understanding how much you may pay allows you to set aside the right amount of money to pay your taxes. IRS form Worksheet 1-1 could help you understand what part of your scholarship is taxable. Then you may file the correct financial income information on tax returns.

Also, make sure to file your qualifying taxable amount by the deadlines. If you are unsure about how to report scholarships on your tax return, consult a CPA or tax professional for your filings.