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4 Reasons Why Your Scholarship Might Be Taxable

Jackie Bright

Executive Director, National Scholarship Providers Association

Generally, most scholarship money is tax-free. However, there are some specific instances where your scholarship would be considered taxable income. 

Here are the four situations that could put you on the hook for a tax bill:

1. You’re not pursuing a degree or your school of choice isn’t an eligible educational institution

The IRS requires you to be pursuing a degree at an institution whose primary purpose is to provide post-secondary education and instruction. It has to have one or more established curricula, an enrolled student body and a facility dedicated to teaching.  Although the majority of schools fall under this definition, it’s a good idea to confirm your institution.

2. You’re using your scholarship money to pay for unqualified expenses

Allocating your scholarship for room and board, insurance, medical expenses, transportation or any expense that is not required for your course completion will result in your money becoming taxable. 

3. Your funds are considered payment for services

Be careful to note if you were awarded a scholarship in exchange for services such as conducting research, assisting the admissions office or teaching.

There are exceptions to this rule, however. Exceptions include if you receive a scholarship or fellowship as a result of the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program or participate in a comprehensive student work program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college (as defined in that section).

4. You didn’t use all the money

Any remaining dollars after qualified expenses will be taxable. For example, if you received a $10,000 scholarship, but your qualified expenses only totaled $9,000, the remaining balance will be taxable.

The bottom line

As with most things in life, it’s important to read the fine print to avoid any surprises. Look for who utilize . Although the number of providers offering this option is small, its popularity is gaining momentum. !If you’re a scholarship provider interested in learning more about utilizing this strategy or other ways to positively impact your scholarship program, contact the National Scholarship Providers Association or visit us in Minneapolis, Oct 1-3rd for our annual Scholarship Providers conference.

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