How to Determine if a Scholarship Is Tax-Free?

Scholarships help students pay for the escalating costs of college, but not all scholarships are tax-free. In order for any scholarship, or part of a scholarship, to be tax-free, you must be a degree-seeking student. In addition, the tax code restricts the tax-free treatment to tuition, required fees, and supplies. Any scholarship money that you spend on non-qualified expenses, such as room and board or non-required fees, is taxable. For example, using scholarship money to buy season tickets to your college's basketball team counts as taxable income.

Step 1

Add the cost of your tuition, required fees, and necessary books and supplies to calculate your total qualified expenses. For example, if you pay $12,000 in tuition, $500 in required fees, and $1,500 for books and other necessary supplies, your total qualified expenses are $14,000.

Step 2

Add up the dollar amount of scholarships you received that are restricted to tuition, required fees, and necessary books and supplies. Add to that the dollar amount of scholarships that can be used for tuition, required fees, and necessary books and supplies -- but also can be used for other expenses at your discretion. This amount determines your total scholarship amount that is eligible for tax-free treatment. Any scholarship money you use for other expenses, or any scholarships that are required to be used on non-qualified expenses, are always taxable. For example, if you have a $10,000 scholarship that you can use for any college expenses, a $5,000 tuition-only scholarship, and a $3,000 scholarship exclusively for room and board, you have $15,000 that's eligible for tax-free treatment.

Step 3

Subtract your total qualified expenses from your total scholarships that could be tax-free to find the taxable portion of your eligible scholarships. For example, if you have $15,000 in scholarships that are eligible for tax-free treatment and $14,000 of qualified expenses, $1,000 of the eligible scholarship amount is taxable.

Warning

  • Any scholarships earmarked for a non-qualified expenses are taxable. For example, if you receive a scholarship that requires that you spend it on traveling to and from the school, it is always taxable.

Photo Credits

  • college campus image by Nick Alexander from Fotolia.com

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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