Abstract: If your child has been awarded a scholarship for college or
another type of school, it’s certainly cause for
celebration. But parents need to be aware of the potential tax implications.
This article explains whether or not scholarships are taxable.
Are scholarships taxable?
Many young
adults are heading off or back to college in the fall. It’s particularly exciting
this year because of high hopes that, thanks to mass vaccinations, students
will be able to have something approaching a traditional college experience.
If your
child has been awarded a scholarship, that’s cause for celebration, too! But be
aware that there may be tax implications.
Generally,
but not always
Scholarships
(and fellowships) are generally tax-free for students at elementary, middle and
high schools, as well as those attending college, graduate school or accredited
vocational schools. It doesn’t matter if the scholarship makes a direct payment
to the individual or reduces tuition.
Subject to
limited exceptions, however, a scholarship isn’t tax-free if the
payments are linked to services that your child performs as a condition for
receiving the award — even if the services are required of all degree
candidates. Therefore, a stipend your child receives for required teaching,
research or other services is taxable, even if the child uses the money for
tuition or related expenses.
What if you,
or a family member, is an employee of an education institution that provides
reduced or free tuition? A reduction in tuition provided to you, your spouse or
your dependents by the school at which you work isn’t included in your income or
subject to tax.
Returns
and recordkeeping
If a
scholarship is tax-free and your child has no other income, the award doesn’t
have to be reported on a tax return. However, any portion of an award that’s
taxable as payment for services is treated as wages. Estimated tax payments may
have to be made if the payor doesn’t withhold enough tax.
Your child
should receive a Form W-2, “Wage and Tax Statement,” showing the amount of
these “wages” and the amount of tax withheld. Any portion of the award that’s
taxable must be reported, even if no Form W-2 is received.
Basic
rules
These are
just a few of the basic rules. Other rules and limitations may apply. For
example, if your child’s scholarship is taxable, it may limit other
higher education tax benefits to which you or your child are entitled. As we
approach the new school year, best wishes for your child’s success. Please
contact us if you wish to discuss this or any other tax matter.
© 2021