You may receive tax benefits on a scholarship.
With the cost of higher education going through the roof, any money saved can go a long way toward helping college students make ends meet. The Internal Revenue Service has a number of ways to help college students claim tax benefits. You may also be able to enjoy some tax savings on scholarships, depending on a number of factors.
Tax-Exempt Scholarship
Generally, if you are a degree candidate, any scholarship amount you receive covering tuition, books and equipment is tax-free. But scholarship funds spent on other living expenses such as room and board are taxable. Also, the IRS treats state and federal grants as scholarships, so they are tax-exempt. Similarly, athletic scholarships are also tax-free, except for the portion covering living expenses. However, non-degree candidates must pay taxes on the full amount of scholarships and grants, even funds spent on tuition and books.
Exemption on Social Security Taxes
Scholarships or grants are also exempt from Social Security taxes. Social Security tax exemption is applicable for both degree and non-degree candidates.
Payment for Services
If a scholarship is awarded as a compensation for teaching or research services, it is taxable. For example, if a person is required to work as a teaching assistant (TA) or research assistant in return for a tuition waiver or stipend, such a grant would become a payment for services and hence would be taxable.
Exceptions
The payment for services rule does not apply if you are a degree candidate and receive the scholarship amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program. These financial aid programs are fully tax-free for qualified expenses.
Tags: Social Security, college students, degree candidate, funds spent, living expenses, non-degree candidates