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.
What is the difference between a scholarship and grant?
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.
When are scholarships tax-free and taxable?
A scholarship is tax-free under two conditions:
- You are pursuing a degree at an eligible institution.
- You use the scholarship money for tuition and other fees like required books, supplies or equipment.
A scholarship is taxable if:
- You are not in a degree program but are receiving payments for research or teaching.
- You use it to pay for housing, travel, or books and supplies NOT required but recommended.
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.
What is the tax situation for grants?
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.
How are taxable scholarships and grants reported to the government?
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.