College is expensive. Parents and students rely on a number of options to pay the bills including scholarships, fellowships and grants. Scholarships, fellowships, and grants may feel like "free money" but they may be taxable.
A scholarship is generally an amount paid or allowed to a student at an educational institution for the purpose of study.
A fellowship grant is generally an amount paid or allowed to an individual for the purpose of study or research.
A scholarship is tax-free under two conditions:
A scholarship is taxable if:
Please note that an athletic scholarship is treated the same as an academic scholarship for tax purposes. If you win a scholarship in a contest, the scholarship is fully taxable.
Grants under the National Health Service Corps Scholarship Program, Armed Forces Health Professions Scholarship and Financial Assistance Program, or the Department of Veterans Affairs are tax-free.
Other types of tax-free grants include need-based grants such as Pell Grants and Fulbright grants.
Form W-2 is used by a college or university to report the taxable portion of scholarships while box 6 of Form 1099G reports any taxable grants received from a federal, state or local government.
Keep in mind if any part of your scholarship or grant is taxable, you may need to make estimated tax payments for the tax year.