You might have been wondering if scholarships are taxable especially since you would not want to remove a certain amount of money from the amount you received to pay your tuition fee.
The scholarship is practically a sum that is granted to students or educational institutes to assist in the pursuit of studies. Scholarships programs are aimed at assisting undergraduates and graduates and certain scholarship programs are particularly granted to Ph.D. students to support research or study.
Usually, scholarships are mostly tax-free especially if you are pursuing your degree studies or the scholarship is used to pay education fees, and other necessary fees including equipment, supplies, and stationery. But some scholarships are not tax-free depending on the amount received and how it is spent. This is why it is important that you check with the financial department of the college for details.
Any money that a student uses to sort out living expenses is however taxable. But then if a scholarship is taxable or is not taxable lies on the expenses sorted with the scholarship amount and if you are a degree student.
Your scholarship can be tax-free if:
-You are seeking a full-time degree program at any accredited and registered academic institution that upholds a formal curriculum and faculty and must have a regularly registered student body.
-you make use of the scholarship amount to sort the qualified education costs
The Qualified Education Costs Are:
-Education costs and other costs for registering or attending any eligible educational program
-Other course applicable costs including supplies, books, fees, and equipment needed during the course at an enrolled educational institution.
To make your scholarship tax free, you have to deter from using the funds for un-qualified education costs like paying for board or room.
Are scholarships Taxable if my Expenses Don’t Qualify?
-Room and board
-Traveling or trips
-Research and experiments
-Equipment and all other costs that are not mandated for registration or registering in a non-eligible educational institution
Scholarship officers can be helpful in cases like this. They are learned when it comes to tax problems that usually bothers the students in their school years. This is why it is advisable that students facing financial aid issues visit the financial aid officers of their country to sort this.
Scholarships From Schools
Scholarships fund is not just when a company or an individual offers you a certain sum of money or send it to your institution to cover up for your tuition fees. But sometimes, schools normally cancel out the entire sum that you owe for the year. Scholarships given by schools are often granted due to academic excellence or to enroll student-athletes in sports programs.
Scholarships vs. Grants
Grants mostly known as fellowship grants are aimed at paying for a particular area of research or study, although Pell grants are different because they are offered based on needs like when the student’s economic condition is disadvantaged that they would not be able to go to college without this financial help.
Scholarships like this are not taxed, except under conditions like:
Where Are You Going to School?
The first entitling requirement for a tax-free scholarship pertains to where you will be going to school. The school is expected to be what the IRS refers to as an “eligible educational institution.” This implies that the institution’s major goal is to give post-secondary tuition and teaching. It has one or more formal curricula, an enrolled student body, and it retains a facility committed to instruction.
Most schools fall under this description, another thing is that the school qualifies if it partakes in the U.S. Department of Education’s student aid program. The Department gives a list of these schools on its website.
Also, make sure you reach out to your school for certainty. You also have to be pursuing a degree before your scholarship is considered tax-free.
Are scholarships taxable if not used for educational expenses?
It is important to keep in mind that if the fee is not used for just “qualified educational expenses.” it is considered to be taxable. So the portion of the scholarship fund that is not used for “qualified educational expenses” will be considered as an income that will be taxed.
Expenses like housing, laptop, and groceries do not fall under “qualified educational expenses.”
Did You Spend All the Money?
If you do not use up all the funds you received from a scholarship for educational expenses, the remaining amount of money becomes taxable income. That is if you received $20,000 as scholarship funds and the total amount needed for tuition is $15,000, this means that $5,000 becomes taxable income.
The Reason For The Scholarship
If your scholarship funds were granted in exchange for delivering services like teaching, research, or even offering assistance in the admissions office, the money becomes taxable—or the percentage pertained to compensation for your services becomes taxable.
What you should note is that you weren’t granted the scholarship just because you conceded to do something in exchange for the money. The whole of most scholarships is not generally given in exchange for services rendered, but one might periodically give an extra $1,500 or $2,000 if you accomplish a certain service or job. Some grants are more likely to assert this “work for it” requirement.
However, note that scholarships granted by the Armed Forces Health Professions Scholarship and Financial Assistance Program or the National Health Service Corps Scholarship Program are independent of the rule regarding services delivered by you in exchange for the money.
Several student work-learning-service programs under Section 448(e) of the Higher Education Act of 1965 and Pell Grants are immune from taxation.
Payments obtained under the G.I. Bill are not deemed to be scholarships or taxable income, and you don’t have to worry about paying taxes on your scholarship if you attend school in another country. However, you must meet all the other criteria.
Student loans are not considered taxable because they are not income, you are expected to pay them back.
Are Scholarships Taxable in 2021? Hope you have seen the things that will cause a scholarship to be taxable?