Please note: The following is general information regarding taxes and is not to be representative of giving tax advice. Please contact your professional tax advisor or the Internal Revenue Service (IRS) regarding your tax situations or questions.
You've paid your taxes for another year and, provided that your withholding is adequate on your W-4, you are prepared for the coming year. In fact with education bills mounting, you anticipate some refunds in the years ahead. Maybe or maybe not. At the risk of breaking some bad news, some scholarship awards can count as income and therefore may be taxable. Read on for planning suggestions.
Some scholarships reduce tuition payments or are given to the recipient as cash. Tax credits, specifically the Hope Scholarship Credit and the Lifetime Learning Credit, reduce the amount paid in taxes.
A scholarship is typically tax-free if the recipient is a full-time or part-time student at a primary, secondary or accredited post-secondary institution, and if the award covers tuition and fees to enroll or attend. The award is also typically tax-free if it covers books, supplies and equipment required for the student's courses. The award typically remains tax-free as long as it is used for these purposes.
But the award is taxed if it is used to cover room and board, travel, clerical help, research, or equipment. If the award covers tuition, books, room and board, the room and board amount is taxable. Unsure as to whether an award is taxable? Ask the organization who sponsored the award or contact the Internal Revenue Service via their help line at 1-800-829-1040.
Tax credits are a different type of financial aid. With the Hope Scholarship Credit, the credit is equal to 100 percent of the first $1,000 spent on tuition, plus 50 percent of the next $1,000. Not surprisingly, the tax credit is for the first two years of college or vocational school for students enrolled at least half-time or more for at least one academic period during the year. However, students must be enrolled in an education program that leads to a degree or certificate in order to be eligible. Also the student cannot have a felony conviction for possessing or distributing a controlled substance. After using the Hope Scholarship Credit for two years, the student may be eligible for the Lifetime Learning Credit. For more information regarding the Hope Scholarship Credit, please review the IRS website: www.irs.gov or call the IRS directly at 800-829-1040.
With the Lifetime Learning Credit, there is no minimum enrollment requirement, which means that the student may take just a course or two without being enrolled in a degree or certificate program. This includes courses taken to upgrade or expand job skills as well as traditional academic courses. Unlike the previously mentioned Hope Scholarship Credit, students doing graduate-level work are also eligible, and there is no limit to the number of years you may claim the Lifetime Learning Credit. Again, for more information regarding the Lifetime Learning Credit, please review the IRS website: www.irs.gov or call 800-829-1040.
With both credits, the amount deducted from taxes is based on overall tuition costs. Each eligible student can be claimed on only one return, so the student or the family may file for the credit, but not both. Additionally, with both credits there are income caps. Please refer to the IRS website at www.irs.gov or contact a tax professional for the income caps. Also, a student who receives a tax-free distribution from an education IRA cannot take the credits in the same year.
To learn more, contact a tax professional or visit the IRS website at www.irs.gov. Be sure to do some investigating on these issues, and find out the details of your particular situation.
After all, it pays to be educated about your taxes and your scholarships.