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Saving for College #3: IRS Treatment of Scholarships and Grants

September 28th

college tuition and taxesToday the best chance for an affordable college education is some kind of financial assistance in the form of a scholarship, grant, or fellowship. While these can all be exceptionally helpful in making college a financially viable option, it is also important to understand how such aid will affect your tax bill so you don’t end up with tax debt.

Scholarships and Fellowships

Scholarships and fellowships are only tax-free if the taxpayer is a candidate for a degree at an eligible educational institution, and the taxpayer intends to use the money to pay for qualifying educational expenses. Eligible institutions must have a regular faculty and curriculum and a regularly enrolled body of students. In order to qualify as tax-free, the scholarship or fellowship must be used for qualifying expenses such as tuition or enrollment fees, or any related expenses such as books and supplies.

However, if the scholarship or fellowship is used for expenses like room and board, travel, or research, the money will not qualify for tax-exempt status. There are some exceptions to this rule, so taxpayers who think they might qualify should investigate further. The best option is to consult the IRS website and discuss options with a tax attorney who can investigate your personal situation.

Grants

Whether or not a grant qualifies for tax-exempt status is dependent on the type of grant in question. The most commonly given grants, federal Pell Grants and other Title IV need-based education grants, are typically treated as scholarships for tax purposes. These grants are tax-free, but only during the period for which the grant is given.

 

 
 
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