Do scholarships count as income?

regenglvr
regenglvr Member Posts: 1 Newcomer
in Filing my taxes

I had a scholarship covering my college tuition, how do I report that?

Answers

  • -Catonerss
    -Catonerss Member Posts: 1 Newcomer

    Q. Do scholarships count as income?

    A. No. Or more specifically, usually not.

    Scholarships that pay for qualified educational expenses (QEE - tuition, fees, books and other course materials) is tax free. Scholarship amounts that exceed QEE is taxable income, on the student’s tax return. Room & board are not QEE.

    Q. I had a scholarship covering my college tuition, how do I report that?

    A. You usually don't report it. The college will issue a IRS form 1098-T. The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you (or more likely your parent) are eligible for a tuition credit or possibly the student has taxable scholarship income. So, you may want to enter it.

    Furthermore, there is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship. You cannot do this if the conditions of the grant are that it be used to pay for qualified expenses.

    Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

    Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket. She would only need to report $5000 of taxable scholarship income, instead of $6000.

    The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit". PUB 970 even has examples of how to do the “loop hole”.

  • CoryF
    CoryF FreeTaxUSA Agent Posts: 231 image
    Hello Catoneras

    The IRS is correct in its language. It is a common practice to free up Tuition expenses for the applicable education credits by claiming that some or all of the scholarship/grants money was used for noneducational materials.

    If the student is claimed by a parent, the scholarship/grants applied to noneducational materials are added as other income to their tax return. The parent is then able to claim the educational credit on their return.

    If the student is claiming him-or-herself, then the scholarship/grants applied to noneducational materials are added to their personal return. The student is then able to claim any educational credit on their return.

    FreeTaxUSA will have guides that will help you understand your options and you are able to go back and forth to find the best allocation of tuition and scholarships/grants to maximize your refund. Follow this menu path: Deductions/Credits > College Tuition (1098-T) to start.

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