Have you ever wondered if you have to pay taxes on the scholarship you received? Well, rest assured that most scholarships are tax-free; however, the Internal Revenue Service (IRS) does have strict guidelines on scholarships and fellowships.

The information provided below comes directly from Publication 520 from the IRS entitled Scholarships and Fellowships. Information will be provided at the end of this section on how to obtain publications from the IRS, phone numbers if you have questions, websites to surf and other information if you have a computer. We encourage you to contact the IRS for all detailed information pertaining to Scholarships and Fellowships.

According to the IRS in Publication 520, a scholarship is generally an amount paid for the benefit of a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or graduate.

A FELLOWSHIP is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.

Tax-free scholarships and fellowships

A scholarship or fellowship is tax-free if:

• You’re a candidate for a degree at an educational institution, and/or
• The grant is a qualified scholarship or fellowship.

The term candidate for a degree means a student (full or part-time) who attends a primary or secondary school, or is pursuing a degree at an accredited college or university, or attends a properly licensed educational institution that is authorized to provide a program that is acceptable for full credit toward a bachelor’s or higher degree, or a program of training to prepare students for gainful employment in a recognized occupation.

A qualified scholarship or fellowship is any amount a student receives as a scholarship or fellowship that is used for tuition and fees to enroll in or to attend an educational institution; or to purchase books, supplies, and equipment that are required of the courses at the school the student plans to attend. These items must be required of all students in the course of instruction.

A scholarship or fellowship can still qualify as tax-free even if the terms do not provide that it be used only for tuition and course-related expenses. It will qualify if you use the proceeds for tuition and course-related expenses. However, if the terms of the grant require its use for other purposes, such as room and board, or it specifies that it cannot be used for tuition or course-related expenses, the amount(s) received are not tax-free.

Pell Grants, Supplement Educational Opportunity Grants and Grants for State Student Incentives are tax-free if they are used for qualifying tuition and course related expenses during the scholarship period.

Scholarship prizes are cash won in a contest and are not scholarships if you do not have to use the prize(s) for educational purposes. These prizes are taxable regardless of how you use the money. A scholarship prize can be used when the candidate is enrolled at a college for a degree.

Additional Information

If you have any doubt about the tax treatment of your scholarship, please consult with the organization(s) from which you receive the scholarship. They may have received advice from the IRS about the appropriate tax treatment of the award. You can also contact the District Director of the IRS for the district where you reside. Be sure to ask for the information as soon as possible so that you can receive the answer in time to file a return, if necessary. You may also call the IRS at (800) 829-1040 or (800) 829-4059 for the hearing impaired. You may also want to contact your tax advisor.

Publications and forms

To order free publications and forms, you can call (800) 829-3676 or write to the IRS Forms Distribution Center nearest you. If you are surfing the net, you can download the forms and other information at http://www.irs.gov.

For a list of free tax publication, order Publication 910 Guide to Free Tax Services. It contains an index of tax topics and related publications and describes other free tax information.

If you have questions about whether your scholarship is tax-free, you can call (800) 829-1040.

Please note: We are not tax specialists; therefore, it’s always best to speak with your tax advisor or college’s financial aid/scholarship department about the tax implications of your award(s).