Given the cost of college today, any assistance helps. And, fortunately, when the assistance comes in the form of a scholarship, there's an added bonus: It’s usually not considered taxable income.
For a scholarship to be tax-free, it needs to meet a few conditions, however. Among the key ones:
- You must be a degree candidate at an eligible educational institution. That’s defined by the IRS as “one whose primary function is the presentation of formal instruction and that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.” In other words, most real colleges.
- The money must go toward what the IRS calls “qualified education expenses,” such as tuition, mandatory fees, and required books and supplies. Room and board doesn’t qualify. Nor does travel.
If part of the scholarship involves payment for services, such as teaching or research, that portion is generally considered taxable. The scholarship provider should send you with a W-2 form around tax time each year, showing the amount that represents taxable compensation.
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The IRS explains all these rules and a few exceptions in Publication 970.
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