Scholarships and Tax Season

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. At the risk of breaking some bad news, some scholarship awards can count as income and therefore may be taxable.

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.

The award is usually taxed if it is used to cover room and board, travel, clerical help, research, or personal expenses. If the award covers tuition, books, room and board, the room and board amount may be 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.

Some scholarships reduce tuition payments or are given to the recipient as cash. Tax credits, specifically the American Opportunity Credit (formerly the Hope Scholarship Credit) and the Lifetime Learning Credit, reduce the amount paid in taxes. Each student may only elect one of the credits per year. Here are some details about claiming these education tax credits.

American Opportunity Credit

  • Who can claim it? You can claim the American Opportunity Credit if you pay college expenses (you are the student) or you pay college expenses for someone else (your spouse or child/dependent). *Note: the dependent (who is listed on someone else’s tax return) cannot claim the credit.
  • What expenses qualify? Qualified education expenses include tuition and other related expenses, such as activity fees, books, supplies, and certain equipment. *Note: Expenses that do not qualify include insurance, medical expenses, room and board, transportation, and personal or family expenses.
  • Who is eligible? Students who have not yet completed the first four years of college (typically, students who have not yet completed an undergraduate program) before the tax year started are eligible. Students must have not claimed the American Opportunity Credit (or the Hope Scholarship Credit) in prior tax years. Students must have been enrolled half time (or more) during the tax year. Students must be free of any felony convictions (federal or state), including the distribution of a controlled substance.
  • Who can claim a dependent’s expenses? You can claim the American Opportunity Credit if your child/dependent is a student and you claim that child/dependent on your tax return.
  • How do you figure the credit? The amount of the credit is the sum of 100% of the first $2,000 of education expenses paid, plus 25% of the next $2,000 of education expenses paid. The maximum amount of credit you can claim is $2,500 per student.
  • How do you claim the credit? You claim the credit by completing Form 8863, which must be submitted with your Form 1040 or 1040A.
  • Need more info? For more information regarding the American Opportunity Credit, please review the IRS website or call the IRS directly at 800-829-1040.

Lifetime Learning Credit

  • Who can claim it? You can claim the Lifetime Learning Credit if you pay college expenses (you are the student) or you pay college expenses for someone else (your spouse or child/dependent). *Note: the dependent (who is listed on someone else’s tax return) cannot claim the credit.
  • What expenses qualify? Qualified education expenses include tuition and other related expenses, such as activity fees, books, supplies, and certain equipment. *Note: Expenses that do not qualify include insurance, medical expenses, room and board, transportation, and personal or family expenses.
  • Who is eligible? Students who are enrolled in at least one course at an educational institution (typically, graduate students or students taking a course to expand a job skill) are considered eligible.
  • Who can claim a dependent’s expenses? You can claim the Lifetime Learning Credit if your child/dependent is a student and you claim that child/dependent on your tax return.
  • How do you figure the credit? The amount of the credit is 20% of the first $10,000 of education expenses paid. The maximum amount of credit you can claim is $2,000 per student; however, that amount may be reduced based on your income.
  • How do you claim the credit? You claim the credit by completing Form 8863, which must be submitted with your Form 1040 or 1040A.
  • Need more info? For more information regarding the Lifetime Learning Credit, please review the IRS website or call the IRS directly at 800-829-1040.

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, both credits have limitations based on income. Please refer to the IRS website at www.irs.gov or contact a tax professional to get more information about income caps. Also, students who receive tax-free educational assistance may be required to adjust the amount of qualified education expenses.

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.

INFORMATION

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