How to Report Taxable Scholarships on Your Tax Return

on April 8, 2016

Part of your scholarships, grants and fellowships may be taxable and part may be tax-free.


Determining the Taxable Portion of Scholarships, Grants and Fellowships

 

Generally, if you are working toward a degree or certificate and your scholarship, grant or fellowship is not a fee for services, the portion that you use to pay for qualified tuition and related expenses may be excluded from income. Qualified tuition and related expenses includes tuition, required fees and required course materials (textbooks, supplies and equipment).


Amounts that are used for room and board, medical expenses (including student health fees), transportation and other living expenses are taxable, even if you are degree-seeking.


How to Interpret IRS Form 1098-T

 

Your college or university will report payments it received for qualified tuition and related expenses on IRS Form 1098-T (Tuition Statement).

  • Box 1 lists payments received for qualified tuition and related expenses from all sources.
  • Box 5 lists scholarships, grants and fellowships of which the college or university is aware. But, these scholarships, fellowships and grants are not necessarily limited to the qualified tuition and related expenses reported in Box 1. 

If a scholarship, grant or fellowship is available for living expenses but not restricted to living expenses, the student can choose to use the money to pay for qualified tuition and related expenses, which would cause the money to be excluded from income. On the other hand, there may be scholarships, grants and fellowships of which the college or university is unaware, such as amounts paid directly to the student.


Thus, the amounts reported on IRS Form 1098-T are a guide that can help you figure out the taxable portion of your scholarships, grants and fellowships, but not necessarily a definitive answer.


Generally, you should think of the amount in Box 1 as the maximum that can be excluded from income (not taxable) and the amount in Box 5 as the scholarships, grants and fellowships of which the college is aware. If Box 5 exceeds Box 1, the IRS knows you have taxable fellowships, scholarships and grants equal to at least the difference between Box 5 and Box 1.


The simplest approach is to report the difference between Box 5 and Box 1, plus any fellowships, scholarships of which your college or university is unaware, as taxable income on your federal income tax return.


But, sometimes you will need to modify this figure. For example, some colleges report only tuition and fees in Box 1 and don’t report course materials. Or they may report an average figure or an allowance for course materials. If your actual spending on required textbooks, supplies and equipment is higher, keep receipts and base the calculation of the taxable portion of your scholarships, grants and fellowships on the actual qualified tuition and related expenses. This might reduce the taxable portion of your scholarships, grants and fellowships.


Reporting Taxable Scholarships, Grants and Fellowships on Your Income Tax Return

 

Include the taxable amount of the scholarships, grants and fellowships in the total for the “Wages, salaries, tips, etc.” line of your federal income tax return:

If the taxable amount of the scholarships, grants and fellowships was reported to you on an IRS Form W-2, you’re done.

 

If the taxable amount was not reported to you on IRS Form W-2, write “SCH” and the taxable amount on

  • The space to the left of line 1 on IRS Form 1040EZ
  • The space to the left of line 7 on IRS Form 1040A
  • The dotted line next to line 7 of IRS Form 1040

Additional Resources

 

For more information, see Chapter 1 (Scholarships, Fellowship Grants, Grants and Tuition Reductions) of IRS Publication 970 and the Instructions for IRS Form 1098-T.

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