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 bad news, some scholarship awards count as income and are therefore taxable. Read on for planning suggestions.

Scholarships reduce tuition payments or send the recipient cash. Tax credits, specifically the Hope Scholarship Credit and the Lifetime Learning Credit, reduce the amount paid in taxes.

A scholarship is tax-free if the student is a full-time or part-time candidate at a primary, secondary or accredited post- secondary institution, and the award covers tuition and fees to enroll or attend. The award is also tax-free if it covers books, supplies and equipment required for the student's courses. The award 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, and 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 taxpayer deducts 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. However, eligibility requirements are that the education program leads to a degree or certificate rather than the student taking some classes that don't lead to a degree. 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.

With the Lifetime Learning Credit, there is no minimum enrollment, which means that the student may take just a course or two without being enrolled in a degree or certificate program. This includes courses that upgrade job skills as well as traditional academic courses. Unlike the previously mentioned Hope Scholarship Credit, graduate-work is eligible and there is no limit to the number of years you may claim the Lifetime Learning Credit.

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. Joint filers with an AGI (adjusted gross income) over $100,00 and single filers with incomes over $50,000 are not eligible to claim either credit. 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 Treasury Department's website at www.irs.ustreas.gov. Find out the details of your particular situation.

After all, it pays to be educated about your taxes and your scholarships.