Higher Education Scholarships and Aid: Are They Taxable?
Often, the deciding factor between enrolling in one educational institution or another is the amount of aid or scholarship money you will receive. However, there is another factor to be considered, and that is—how much of the aid or scholarship money will be taxable if spent on items considered noneducational by the Internal Revenue Service (IRS)? In addition, how much work-related study expense is deductible when you are trying to improve your life by learning all you can?
Scholarships, Grants, and Work-Study— What is “Income”?
Students who receive financial aid in the form of scholarships, grants, or work-study arrangements need to be vigilant in their understanding of which parts are considered taxable and which are not. The portion of aid that is taxable is that which applies to room, board, travel, and other noneducational expenses, as well as certain work-study dollars; money received for tuition, fees, books, supplies, and course-required equipment is nontaxable.
Taxes are payable by the aid recipient, who may not receive enough yearly income to owe tax, especially if he or she files independently and can take a personal exemption. Students claimed on their parents’ tax returns might not fare as well. It is important to understand that if a parent is entitled to claim a child as a dependent, the parent must do so or the exemption is lost. This is a “use it or lose it” proposition for parents; a dependent exemption cannot be given to a child as a personal exemption on the child’s tax return.
The key is to apply aid first to tax-free expenses, such as tuition and fees. The taxable portion will be only that which exceeds these amounts. School bills should detail these items quite specifically and show scholarship monies received, as well.
Work-study income, teaching grants, and project assistantships will be taxable if they are not integral to a student’s studies (if they benefit the school rather than the student). Research assistantships that do not “benefit” the school are tax free. Many schools will withhold income taxes and give the student a W-2 Form at tax filing time if the income is deemed taxable, but the IRS can check on all income received.
To date, the IRS has always assumed that students receiving certain types of financial aid would report it as income for tax purposes. With the belief that compliance, in reality, may be rather low, the IRS is taking a more active role in assuring that it is, indeed, met. This may mean colleges, at some point, will need to submit the names of students receiving aid, along with the amount received, on a yearly basis.
The regressive nature of the tax requirements is unfortunate—the students with the greatest needs may receive the most aid and may be least able to afford the taxes that may be due. Schools will, hopefully, recognize this in their aid formulas and make adjustments to lessen the scope of the tax bite.
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