Tax and Business Alert –
July 2023
384 words
Abstract: If your child is 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 when a
scholarship may be taxable.
Are scholarships taxable?
If your
child has been awarded a scholarship, that’s cause for celebration. For some
students, it will mean the difference between going to the college of their
choice or starting at community college — or even not going at all. But be
aware that scholarships may bring 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.
However, subject
to limited exceptions, 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 fortunate enough to be 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.
©
2023