Scholarships and grants can help pay for school, but not every dollar you receive is automatically tax-free. Whether your scholarship or grant is taxable depends on how you use the money and your student status.
When Is a Scholarship or Grant Tax-Free?
In most cases, scholarship and fellowship grant funds are tax-free if both of the following are true:
- You're pursuing a degree at an eligible educational institution with a regular faculty, curriculum, and enrolled student body.
- You use the funds to pay qualified education expenses, such as:
- Tuition and fees
- Required books
- Required supplies
- Required equipment needed for your courses
If your scholarship is used only for qualified education expenses, you generally won't need to include that amount in your taxable income.
When Is a Scholarship or Grant Taxable?
You must include scholarship or grant funds in your taxable income if they're used for expenses that aren't qualified education expenses.
Common taxable uses include:
- Room and board
- Housing or meal plans
- Travel expenses
- Optional equipment that isn't required for your coursework
- Payment for teaching, research, or other services performed as a condition of receiving the scholarship or grant
There are limited exceptions for certain service-based scholarship programs, including:
- National Health Service Corps Scholarship Program
- Armed Forces Health Professions Scholarship and Financial Assistance Program
- Certain comprehensive work-learning-service programs
If part of your scholarship or grant was used for qualified expenses and part was used for non-qualified expenses, only the non-qualified portion is generally taxable.
What If I Have Excess Scholarship Income?
If your scholarship or grant exceeded your qualified education expenses, the excess amount may be taxable and must be reported on your tax return.
For example, if you received a $10,000 scholarship but only used $8,000 for qualified education expenses, the remaining $2,000 may be taxable income.
What About a Dependent's Scholarship Income?
Taxable scholarship and grant income should be reported only by the person who received it.
If you're claiming an education credit for your dependent and that dependent has taxable scholarship income, the dependent generally must report that income on their own tax return if they have a filing requirement.
How Do I Enter Taxable Scholarship or Grant Income?
If all or part of your scholarship or grant is taxable, enter it in the software by following these steps:
- Select Federal
- Select Income (then Select My Forms)
- Select Less Common Income
- Select Other Compensation
- Select Scholarships and Grants
The software will help determine whether any portion of your scholarship or grant needs to be included in your taxable income.
Key Takeaway
Scholarships and grants used for tuition and other required education expenses are usually tax-free. However, amounts used for living expenses, travel, optional equipment, or compensation for services are often taxable. If you're unsure whether part of your scholarship is taxable, enter the information in your return and review how the funds were used. Doing so can help you report the correct amount and avoid tax surprises later.