What exactly is a scholarship?

Can I be taxed for my scholarship?

• This is my first year in college and I have received a scholarship for the academic year. I heard that I can be taxed for my scholarship. Is this true? Is there any way to not be taxed for my scholarship (why be punished for being a good student)? Also, I got an email from my school about a 1098T form. From what I've read, it's relating to scholarship taxes, but I am confused as to what exactly it is. Any information about this is greatly appreciated!

• Answer:

  Arbitrary: If you're interested in wading through a lengthy document that will answer any question you could possibly have about the tax treatment of educational assistance, whether it's scholarships, grants or any other form, the IRS publication that you need is Publication 970, which I have linked below. I can save you a little bit of reading by providing a brief summary: Money that you receive as a scholarship is not considered income, and it is NOT taxable (or reportable) if you use all of those funds to pay for tuition, school fees, books, and equipment and materials that are required of all students in your program. Scholarships become taxable income when they are used to pay for other, so-called "non-qualified educational expenses". Common expenditures in this category include room and board, travel expenses and insurance payments. If you used part of your scholarship for qualified expenses and part for non-qualified expenses, you must report the dollar amount of funds that were used for non-qualified expenses. The 1098-T is used by scholarship recipients and recipients of certain forms of financial aid in order to evaluate their eligibility for the three forms of special tax treatment for educational expenses - the Hope Credit, the Life Long Learning Credit, and the Tuition and Fees Deduction. You can find information about all three of those treatments in that Publication 970 that I'm linking to, below. The rules of all three are relatively complex - but they can potentially save you (or your parents) a lot of money on their taxes each year. I would strongly recommend that you (or they) consider consultation with an experienced accountant or financial advisor, or, if you're comfortable with them, the popular tax preparation software tools (TurboTax, etc) will ask questions to determine whether you qualify to take any of these education-expense tax treatments. So - there you have it. No effect on income, and non-taxable, unless you spent some portion of those scholarship funds on "non-qualified" educational expenses.. I hope that helped you - good luck!