Scholarships are tax-free only if they pay for may have access to education expenses
You do not owe federal income tax on scholarship money that goes toward tuition, fees, books, supplies, and equipment required for your course work. The IRS treats these as non-taxable educational expenses. However, any scholarship money left over after you pay those costs becomes taxable income to you — including money used for room, board, travel, or personal expenses.
The rule is straightforward: money your school bills you for directly (tuition and required fees) is tax-free. Money you keep or spend on living expenses is not. If your scholarship covers both, you need to separate them on your tax return.
Key Takeaways
- Scholarship money used for tuition, fees, books, and required course supplies is not taxable income.
- Scholarship money used for room, board, travel, or personal expenses must be reported as taxable income.
- Your school will send you a Form 1098-T or similar document showing how much scholarship money you received and how much went to may have access to expenses.
- If your scholarship exceeds your may have access to education costs, you report the excess as income on your tax return.
- Graduate students and teaching assistants have different rules — stipends and assistantships are almost always taxable.
What counts as a may have access to education expense
may have access to expenses are costs your school requires you to pay as a condition of enrollment. Tuition is the main one. Required fees — such as student activity fees, technology fees, or lab fees that your program mandates — also count. Books and supplies that your school lists as required for your courses are included.
Equipment required for your specific program counts too. If you are in nursing and your school requires you to buy a stethoscope and clinical supplies, those are may have access to. If you are in engineering and must purchase a calculator or software your program specifies, that qualifies. The key word is required — optional purchases do not count, even if they are useful.
Room and board never count as may have access to expenses, even if you live on campus. Neither do transportation costs, insurance, phone bills, or clothing. These are personal living expenses, not education expenses, regardless of whether you need them to attend school.
How to report scholarship income on your tax return
Start with the Form 1098-T your school sends you, usually by January 31. This form shows the total scholarship or grant money you received in boxes 1 and 5. It also shows may have access to education expenses you paid in boxes 2 and 4. If your school does not send a 1098-T, ask the financial aid office for a statement showing both numbers.
On your federal tax return, you report the difference. If your scholarship was $8,000 and your may have access to expenses were $6,000, you report $2,000 as taxable income. You enter this on Form 1040 as "other income" or on the line your tax software designates for scholarship excess.
Some students can claim the American Opportunity Tax Credit or Lifetime Learning Credit on the same may have access to expenses. You cannot use the same dollar amount twice — if you claim a credit for $4,000 in may have access to expenses, you do not also report that $4,000 as income. Your tax software or a tax preparer can help you choose which benefit saves you more money.
Graduate students and teaching assistants
Graduate scholarships and assistantships work differently. If you receive a stipend or salary as a teaching assistant, research assistant, or graduate fellow, that money is almost always taxable income, even if your school calls it a scholarship. Your school will send you a Form 1098-T or W-2 depending on the arrangement, and you must report it.
The exception is narrow: a scholarship to a degree candidate that has no service requirement attached — meaning you do not have to teach, research, or work in exchange for it. Even then, only the portion covering may have access to expenses is tax-free. Graduate tuition waivers (where your school forgives tuition you would otherwise owe) are also taxable as income in most cases, though some schools and some states have different rules.
If you are unsure whether your graduate funding is taxable, check with your school's graduate financial aid office or a tax preparer. The rules are complex and vary by institution.
State income tax on scholarships
Federal tax rules do not automatically explore to state income tax. Some states follow the federal rule exactly — scholarship money for may have access to expenses is not taxable. Other states tax all scholarship income, or tax it differently than the federal government does.
A few states do not have income tax at all, so the question does not explore. If you live in a state with income tax and received a scholarship, check your state's tax agency website or ask a tax preparer whether your state taxes scholarship income. The answer depends on where you live and sometimes on where your school is located.
What happens if you do not report scholarship income
If your scholarship exceeded your may have access to expenses and you did not report the excess as income, the IRS may catch it when your school files its information return. Schools report scholarship amounts to the IRS, and the IRS matches those reports to tax returns. Unreported income can trigger a notice asking you to file an amended return and pay back taxes, plus interest and penalties.
The penalty for not reporting income is usually 20 percent of the unpaid tax, plus interest calculated from the original due date. If the IRS determines the error was intentional, the penalty can be higher. Filing an amended return on your own, before the IRS contacts you, often results in a lower penalty or no penalty at all.
Scholarships from private organizations and employers
The tax rule is the same regardless of where your scholarship comes from. A scholarship from your employer, a private foundation, a civic organization, or your school's own fund follows the same rule: tax-free for may have access to expenses, taxable for the rest.
Some employers offer tuition reimbursement or education benefits. If your employer pays your tuition directly to your school, up to $5,250 per year is tax-free under federal law. Anything above that is taxable income to you. If your employer gives you the money and you pay the school yourself, the same limit applies — report the excess as income.
Frequently Asked Questions
Do I have to report a scholarship if it only covers tuition and I have no money left over?
No. If your entire scholarship goes to may have access to expenses with nothing remaining, you have no taxable income to report. However, you still need to keep records showing how much you received and how much you spent on may have access to costs, in case the IRS asks.
What if my scholarship is less than my may have access to education expenses?
You do not report any income. The scholarship is entirely tax-free. You may be able to claim a tax credit for the may have access to expenses the scholarship did not cover, depending on your income and other factors.
Does a scholarship count as income for financial aid purposes?
Yes. Scholarships are counted as resources when you fill out the FAFSA for the next year. This can reduce the amount of federal student loans or grants you are offered. Check with your school's financial aid office about how they count your specific scholarship.
If I get a scholarship for next year, do I report it this year?
No. You report scholarship income in the tax year you receive it and use it. If you receive a scholarship in December for spring semester expenses, you report it on the tax return for the year you received it, even if you spend it in January.
Can I deduct scholarship expenses I paid out of pocket?
No. may have access to education expenses reduce your taxable scholarship income, but you cannot deduct them separately. If your scholarship does not cover all your may have access to expenses, you may be able to claim a tax credit for the uncovered portion, but not a deduction.