Key Points

  • Scholarship money is generally taxation gratuitous provided yous are a candidate for a caste at an eligible institution and apply the money to pay for qualified expenses.

  • Instruction tax credits include the American Opportunity Tax Credit and the Lifetime Learning Credit.

  • The tuition and fees deduction has expired, but yous may be eligible to deduct student loan interest from your taxable income.

Beloved Carrie,

My daughter was lucky plenty to receive a significant college scholarship. Is this considered taxable income to her? And does her scholarship limit my power to claim an didactics tax credit?

—A Reader

Dear Reader,

First congratulations to your girl—and to you lot. Her scholarship can be a significant financial heave for both of you. And this is a great question because it touches on issues that both students and parents need to exist aware of when filing tax returns.

Outset, the skilful news for your girl is that scholarship money, for the nearly part, isn't taxable considering it isn't considered income. The good news for you is that you still may be able to claim an pedagogy revenue enhancement credit on your render as long every bit you lot pay qualified expenses above and beyond what your girl's scholarship covers.

Of class, when it comes to taxes, there'due south rarely a simple yes or no answer. So before you get-go celebrating, let's look a little more closely at each situation.

Scholarships that are revenue enhancement-free

According to the IRS, certain conditions must be met for a scholarship or fellowship to be tax-complimentary:

  • The student must be a caste candidate at an eligible educational institution, which generally ways an establishment with a regular kinesthesia and curriculum and a regularly enrolled torso of students.

  • The scholarship or fellowship coin is used for qualified expenses. This includes tuition and fees, books, and course- or degree-related costs (like supplies required for specific classes) simply does not include other college-related costs such as room, board and travel.
  • The money does not represent wages for teaching or other work.

That sounds pretty clear. Even so, for a scholarship to be completely tax-free, all the money must be used for qualified expenses. For example, if your daughter received a $ten,000 scholarship and tuition was $15,000, she wouldn't owe taxes on the money. However, if her scholarship was $xx,000 and $5,000 went for room and board, that $5,000 would exist considered taxable income.

Scholarships considered taxable income

Now let's say your daughter is a grad student with a fellowship that requires her to exist a education assistant. In this instance, the tax rules are different. That's because scholarship or fellowship money that represents compensation is taxable—regardless of how the money is used. So even if a $20,000 teaching assistant fellowship went primarily to pay for tuition and books, that $20,000 would nonetheless be considered taxable income. The student would receive a W-2 from the schoolhouse and would accept to file a revenue enhancement return.

A couple of exceptions

These IRS rules apply to scholarships (both merit and athletic), fellowships and grants— including government-sponsored, demand-based Pell Grants. Yet, there are exceptions.

For example, payments made through the GI Neb aren't considered scholarships, nor are they considered taxable income. Students participating in the National Wellness Service Corps Scholarship Program or the War machine Health Professions Scholarship and Financial Assistance Program too don't generally pay taxes on their aid for qualified education expense. Pupil loans, of course, are never taxable since they aren't considered income, and take to be repaid.

And just to exist very articulate, scholarships awarded to students who are not in a degree plan are always taxable.

How didactics tax credits fit in

Pedagogy tax credits, which direct reduce the amount of income revenue enhancement you pay, could be another way to commencement some of your daughter'south qualified college expenses, depending on your own income. In that location are 2 possible credits available:

  • American Opportunity Tax Credit (AOTC)—This credit allows an annual maximum credit of $2,500 per student for iv years of undergraduate education. To qualify for the full credit, your modified adjusted gross income (MAGI) must exist $80,000 or less ($160,000 or less for married filing jointly). The credit is phased out for taxpayers with incomes in a higher place these levels.
  • The Lifetime Learning Credit (LLC)—This credit allows a maximum of $2,000 per year per tax return (not per pupil), but it can utilize to undergraduate, graduate or professional degree courses, with no limit on the number of years. Income limitations are lower: in 2019 MAGI must be $68,000 or less for individuals ($136,000 or less for married filing jointly).

If you qualify for both credits, you must cull i or the other. Yous can't use both.

Don't forget deductions

A tax deduction reduces your taxable income. Unfortunately one of the two previous deductions, the tuition and fees deduction, expired after the 2017 tax yr.

However, if you lot are paying involvement on a student loan for your daughter's education, y'all may exist eligible to deduct up to $2,500, provided your 2019 MAGI is less than $85,000 ($170,000 if filing a joint return).

Get the total details

This is merely the topline information, merely information technology should give you lot a good offset. To make sure your state of affairs falls within all the IRS parameters, get to irs.gov/uac/Tax-Benefits-for-Education:-Information-Centre or consult IRS Publication 970: Tax Benefits for Pedagogy . Better yet, talk to your accountant or other taxation professional. And all-time of luck to your daughter.

Have a personal finance question? Email us at askcarrie@schwab.com . Carrie cannot reply to questions straight, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact  Schwab.

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