When you receive a scholarship for educational costs, you need to know how the Internal Revenue Service treats the amount for tax purposes to avoid income tax penalties. The IRS only allows tuition scholarships to be tax-free for degree-seeking students. Other scholarships may have to be included in your taxable income.
When your scholarship exceeds your tuition and required fees, the excess will always be considered taxable. This applies to your scholarship total, not each individual scholarship. For example, if you have a scholarship from the school of $15,000 and a private foundation scholarship of $10,000, your total scholarship aid would be $25,000. If your tuition and mandatory fees total $23,000, the $2,000 difference counts as taxable income.
The IRS defines degree candidates as those attending a primary school, secondary school or pursuing a degree at a college or university. Degree seeking candidates also include people attending an accredited educational institution providing classes for credit toward a bachelor's degree or trade education in a recognized occupation. However, if you are taking continuing education classes and are not working toward a degree, you would not be considered a degree candidate.
Certain money used for tuition may not count as scholarships for tax purposes. If you receive the money for services performed, you cannot count it as a scholarship even if it goes directly toward your tuition. For example, if you have an on-campus job that applies your wages to your tuition, you must still include that amount as taxable income. Also, money received as a prize for competitions that do not require the award to be used for tuition cannot be counted as scholarships.
Reporting Taxable Tuition Scholarships
If your scholarship covers only your tuition and you are a degree-seeking student, you do not have to report any of your scholarship on your income taxes. However, if you are not a degree-seeking student, you must include the scholarship as taxable income. To do so, add the amount of your scholarship to your other taxable income and report the total. Next to the line on which you report your scholarship and other wage income, write “SCH” and the amount to denote how much of your income came from the scholarship.