Typically, a scholarship or Pell Grant is tax-free if you are a degree candidate and the funds are used to pay for tuition, fees and books, supplies and equipment that are REQUIRED for enrollment or attendance at a qualified institution.
However, there are instances where some or all of the scholarship or Pell Grant becomes taxable. Here are some examples:
- Non-degree seeking students – If the individual is not a degree candidate, the entire amount of the scholarship is subject to federal income tax.
- Amounts used for expenses at non-qualified institutions.
- Amounts received that exceed qualified expenses. See examples of non-qualified expenses below.
- Amounts that the scholarship or grant requires to be used for expenses other than qualified expenses.
- Scholarships awarded as compensation such as teaching and research services performed by the student. The amount of the reward that represents payment is fully taxable.
Examples of non-qualified expenses – room and board, travel, equipment and other expenses not required for enrollment.
Things to consider:
You may want to consider including otherwise tax-free scholarships and grants in income. Doing so would increase your income, but may increase your education credits, and reduce your tax liability. To see examples of when this may be a benefit, see the ‘Coordination with Pell Grants and other scholarship‘ section of IRS Publication 970.
Keep in mind, the qualified expenses used to make a portion or all of the awards non-taxable cannot also be included for the education credits. That would be double dipping.
Although room and board is not considered a qualified education expense in terms of your federal taxes, you may be able to deduct the taxable portion of the grant used for room and board on your Ohio tax return (IT 1040, Schedule A). See page 24 of Ohio’s IT-1040 Booklet to see requirements to qualify. The booklet also includes a worksheet to help you determine the amount of the deduction.
For more information on taxability of scholarships and grants, see these helpful links:
IRS Worksheet 1-1 – Taxable Scholarship and Fellowship Grant Income