It’s tax season again and one of the most common questions from students right now is whether or not they have to claim their financial aid (grants, loans, or scholarships) on their taxes. So to clarify, students have to claim on their IRS tax forms any money gained from services for which they received payment, investments, and self-employment income. Generally, amounts spent on education, scholarships, grants, and loans are non-taxable, though there are some exceptions. To note, most tax-free treatment of income, credits, and deductions require the student to be a degree candidate, but not all.
Before getting to what you do and do not need to claim, let’s look at a term you will be seeing a lot and what it means. In order to be tax-free, student aid must be used for Qualified Education Expenses. What constitutes a QEE? This is any money used for tuition, fees, books, supplies, and equipment required for courses. Unfortunately, room and board does not count, so do not include it in your calculations! You can often include a computer, providing it is a requirement of a class or the university.
Types of Student Aid
There are four major sources of financial aid for students- loans, grants, fellowships and scholarships. While all similar, they might differ in terms and conditions which means you may not need to claim one, though you might have to claim another. The following is a list of “income” sources and how to claim them on your taxes.
- Student Loans: Student loans are not considered taxable income because you are required to pay the money back. However, if the remainder of a student loan is forgiven or canceled, that amount is subject to taxes, though there are exceptions to this as well. There are also deductions for the interest paid on loans, but more on this later.
- Grants, Scholarships and Fellowships: These are generally tax-free providing they are used on qualified education expenses. However, if you do not use the full allotment towards these items, the leftover funds ARE considered taxable income and you need to claim them. Any of this money spent on room and board is considered taxable income and cannot be excluded. Should you win a scholarship contest, the entire amount is taxable if it is not specifically designated for educational costs. However, if you win money that must go towards education (like those provided by ScholarhipPoints.com), then the amount is not taxable. There is no need for reporting if your grant or scholarship meets these requirements and is non-taxable.
- Fulbright grants: Fulbright grants are treated like scholarships and do not need to be claimed unless you are receiving money for teaching or lecturing, at which point it is considered income for services and is subject to tax.
- Refund Checks: Tuition refund checks can be taxable if they include money from scholarships and some grants. Loan refunds are non taxable as the money does need to be repaid.
For students, knowing when to claim financial aid on your taxes can be tricky. If you are unsure of any financial information regarding your education, make sure to consult your 1098-T form. Your school will mail this to you sometime in February, and it includes important financial information including amounts paid for tuition, scholarships, and grants.
So now that you know a little more about what types of student aid you need to claim on your taxes, read part two of this article: Tax Deductions and Credits for Education
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