Q:

Are scholarships taxable?

A:

Quick Answer

The Internal Revenue Service considers scholarship income to be tax-free if the student is a degree candidate at an eligible institution and the money is used for qualified educational expenses. Scholarship income is taxable if it is used for unauthorized expenses or the student performs services to earn the money.

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Full Answer

A student is a degree candidate eligible for tax-free consideration for scholarship income while attending a primary or secondary school, studying for a degree at a college or university, or training for gainful employment. The educational institution must be nationally accredited and authorized by state or federal law. It must have a standard faculty and curriculum and maintain a facility where a student body regularly attends classes. Qualified expenses include tuition, fees, books, supplies and equipment needed to carry out studies at the institution.

Expenses that do not qualify for tax-free status include room and board, research, travel, clerical help and optional equipment. Scholarships stipulating that students must perform work like research, teaching and other services in return for payment of tuition and other expenses are not tax-free. However, if the scholarship is obtained through the Armed Forces Health Professions Scholarship Program, the National Health Service Corps Scholarship Program or any program by the Department of Veterans Affairs, the scholarship is tax-free even if the student performs services.

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