College grant or scholarship assistance is largely tax-free if the student is studying for a degree at a qualified educational establishment and the funds are utilized to cover eligible expenditures. There are a handful of exemptions to this rule that may end up making the academic scholarships taxable.
The taxable component of a scholarship is used for living costs like room and board. If your kid obtains a college grant or scholarship that surpasses $12,400, you will be expected to file a tax return.
If your kid obtains less, you could apply for the Earned Income Tax Credit to be reimbursed for the federal taxes deferred from your paycheck. If you obtain more than you require, you should also disclose the excess on your tax return.
While determining how much of a college grant or scholarship aid is taxable, it is critical to consider the form of grant or scholarship.
A fellowship grant is a sum of money paid to or given to a person for the objective of study or research. Need-based grants (such as Pell Grants) and Fulbright grants are two additional types of grants. A scholarship or grant is tax-free when it does not surpass the amount required to fund eligible educational costs.
If you are unsure whether your award is taxable, contact the entity that funded it! They will have IRS details about the tax status of the award. If you have queries, ask them as soon as you can so that you can get responses before the end of the tax season.
Criteria To Gain a Tax-Free Scholarship
Specific criteria must be fulfilled, according to the IRS, for a scholarship or fellowship to be tax-free:
- The student needs to be a degree candidate at a qualified academic facility, which essentially implies one with a standard faculty and curriculum as well as a normally registered student body.
- The scholarship or fellowship funds will only be used for qualified expenses. Tuition and fees, books, and course or degree-related costs are all included (like supplies and equipment required for specific classes). It excludes other college-related expenses such as room and board and travel.
- The funds don’t really constitute wages for teaching or other types of work (unless services are required by certain scholarship programs).
Also, keep in mind that in order for a scholarship to be completely tax-free, all the funds should be used for qualified educational expenses.
For instance, if your child obtained a $10,000 scholarship and her tuition was $15,000, she would not be required to pay taxes on the money. Nevertheless, if her scholarship was $20,000 and $5,000 was used for room and board, that $5,000 might be taxable income.
What Isn’t Considered a Qualified Educational Expense
- Cash used for miscellaneous expenditures including lodging, transportation, and elective equipment.
- Cash paid for learning, research, or even other service needed as a requirement for obtaining a scholarship or fellowship grant. You don’t have to include in your gross income any sums received for the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, or a detailed student work-learning-service program (as specified in section 448€ of the Higher Education Act of 1965) managed by a work college.
How to Report Taxable College Grant or Scholarship Aid as a Parent
You should report whatever scholarship, fellowship grant, or other grants that are included in your gross income. Here’s a simple summary for reporting your child’s scholarship, fellowship, or grant income based on the return form you’re using:
- If you’re filing Form 1040, also provide the taxable income in the total on the “Wages, salaries, and tips” line. If the taxable sum wasn’t disclosed on Form W-2, add “SCH” and the taxable amount to the “Wages, salaries, and tips” line.
- If you are filing Form 1040SR, include the taxable income in the total on the “Wages, salaries, and tips” line. If the taxable sum was not disclosed on Form W-2, add “SCH” and the taxable sum to the “Wages, salaries, and tips” line.
- When you are submitting a 1040NR form, include the taxable income in the sum on the “Scholarship and fellowship grants” line.
Parental Education Tax Credits Available in 2023
for 2023, here are two possible credits:
- The American Opportunity Tax Credit (AOTC): This provides the highest possible annual credit of $2,500 per student for four years of college education. To be qualified to apply for the full credit, you should have a modified adjusted gross income (MAGI) of $80,000 or less ($160,000 or less if married and filing jointly).The compensation is discontinued for single filers with incomes around $80,000 and $90,000 (between $160,000 and $180,000 for joint filers).
- Credit for Lifetime Learning (LLC): This credit is worth up to $2,000 per year per tax return (not per student), and it could be applied to undergraduate, graduate, or professional degree courses, with no timeframe. The earnings and phase-out limits are similar to those for the AOTC ($80,000-$90,000 for single filers and $160,000-$180,000 for married filers filing jointly).
If you are eligible for both credits, you have to choose. Both tax credits cannot be used on the same student in the exact same tax year.
Academic scholarships are normally tax-free if the student is pursuing a degree at a qualified educational establishment and the funds are utilized to cover eligible expenditures.
If you are making payments on a student loan for your children’s college, you can recoup up to $2,500 if your 2022 MAGI is far less than $70,000 ($145,000 if filing jointly). This deduction is discontinued when MAGI exceeds $85,000 ($175,000 for joint returns).