Going to college is a huge step in life to broaden your horizons. With this step, comes the hurdle of funding the education. For many, scholarships and grants make attending college a reality and because of this, the IRS is lenient on what they enforce as taxable scholarship money. It is important to differentiate ahead of time what part of the money is defined as income, and if it will add to your tax liability to avoid a surprise down the road.
Tax Exempt Scholarships
Generally, at an accredited college or university, students will avoid paying taxes when using their funds for basic education driven expenses. The IRS has deemed the following “qualified education expenses” that will not add to the tax liability of a student.
- Student/university fees
- Books or any required course supplies
When dealing with scholarship funds, it is important to note that any left over money after the qualified expenses must be included as part of your taxable income. However, depending on what they are to be used for, certain scholarships are subject to taxation. Usually, these are scholarships or funds to pay for the following:
- Room and Board
- General living expenses (bills, food)
Taxable Stipend Scholarships
Finally, the other type of scholarship funds to be aware of are stipends. Stipend Scholarships are viewed as compensation for services you will provide in the future. For example, you can receive a $5,000 stipend with $2,000 designated to pay for your services. The $2,000 will be viewed as part of your taxable income, and the other $3,000 is tax exempt scholarship money. These types of scholarships are common for teaching and military services.
If you received a scholarship towards your education, it is important to find out the tax stipulations immediately. If part of your scholarship is subject to taxation you will usually receive a W-2 from the provider describing the taxable portion, and you can report this using Form 1040.