How to Report Income From Scholarships on Your Tax Return
Scholarships and other financial aid awards are generally tax-free if they are used to pay for qualified education expenses, such as tuition, fees, and books. However, some parts of a scholarship may be taxable if they are used for non-qualified education expenses or if they are considered taxable income by the Internal Revenue Service (IRS).
We explain how this works in more detail now and also tell you how to report income from scholarships on your taxes.
How Do I Know if My Scholarship is Taxable?
Generally, if you are working toward a degree or certificate, and your scholarship, grant, or fellowship is not a fee for services, the portion that you use to pay for qualified tuition and related expenses may be excluded from income. Those expenses are generally considered qualified expenses.
Qualified tuition and related expenses include tuition, required fees, and required course materials (textbooks, supplies, and equipment).
Amounts that are used for room and board, medical expenses (including student health fees), transportation, and other living expenses are taxable, even if you are degree-seeking. These expenses are generally considered non-qualified expenses.
Scholarships that are paid in cash or directly to you, the student, may also be taxable if the amount of the award exceeds the amount allowed for qualified education expenses.
How much will you be expected to pay?
Create a Appily account to see your net cost for any school.
How to Interpret IRS Form 1098-T
Your college or university will report payments it received for qualified tuition and related expenses on IRS Form 1098-T (Tuition Statement). Then you will receive a copy.
- Box 1 lists payments received for qualified tuition and related expenses from all sources.
- Box 5 lists scholarships, grants, and fellowships of which the college or university is aware. But, these scholarships, fellowships, and grants are not necessarily limited to the qualified tuition and related expenses reported in Box 1.
If a scholarship, grant, or fellowship is available for living expenses but not restricted to living expenses, the student can choose to use the money to pay for qualified tuition and related expenses, which would cause the money to be excluded from income.
On the other hand, there may be scholarships, grants, and fellowships of which the college or university is unaware, such as amounts paid directly to the student.
Thus, the amounts reported on IRS Form 1098-T are a guide that can help you figure out the taxable portion of your scholarships, grants, and fellowships, but they are not necessarily a definitive answer.
Generally, you should consider the amount in Box 1 as the maximum that can be excluded from income (not taxable) and the amount in Box 5 as the scholarships, grants, and fellowships the college is aware of. If Box 5 exceeds Box 1, the IRS knows you have taxable fellowships, scholarships, and grants equal to at least the difference between Box 5 and Box 1.
The simplest approach is to report the difference between Box 5 and Box 1, plus any fellowships and scholarships your college or university is unaware of as taxable income on your federal income tax return.
But, sometimes, you will need to modify this figure. For example, some colleges report only tuition and fees in Box 1 and don’t report course materials. Or they may report an average figure or an allowance for course materials.
If your actual spending on required textbooks, supplies, and equipment is higher, keep receipts and base the calculation of the taxable portion of your scholarships, grants, and fellowships on the actual qualified tuition and related expenses. This might reduce the taxable portion of your scholarships, grants, and fellowships.
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Reporting Taxable Scholarships, Grants and Fellowships on Your Income Tax Return
Include the taxable amount of the scholarships, grants, and fellowships in the total for the “Wages, salaries, tips, etc.” line of your federal income tax return:
If the taxable amount of the scholarships, grants, and fellowships were reported to you on an IRS Form W-2, you’re done.
If the taxable amount was not reported to you on IRS Form W-2, write “SCH” and the taxable amount on
- The space to the left of line 1 on IRS Form 1040EZ
- The space to the left of line 7 on IRS Form 1040A
- The dotted line next to line 7 of IRS Form 1040