One of the benefits of being a good student in high school (or filling out many different forms from many different organizations and attempting to make up for not being a great student) is earning a scholarship and having some of your tuition and books paid for.
What is a Scholarship?
For those unaware, a scholarship is generally awarded by an organization (usually a non-profit) to a student for outstanding grades, athletic ability, or some other attribute of the student. It is generally monetary and must be used toward school tuition or necessary supplies for classes.
Scholarships generally are tax-favored for those receiving them.
Great, so my Scholarship is Tax-Free?
Possibly. Obviously nothing is quite that black and white with taxes. For the portion of your scholarship that does not exceed your education expenses and does not represent wages that were earned for the scholarship, yes it is tax-free.
If the organization did not specify that your scholarship must be used for education expenses, part or all of the scholarship is generally going to be taxable.
If any of the scholarship represents wages that were earned, then the organization will report those wages on a Form W-2 and you must report this income on line 1 of Form 1040 (your personal income tax return).
Can I use my Scholarships toward education credits?
When it comes to the tax education credits and benefits, you generally can’t double dip. If your tax-free scholarship covered some or all of your education expenses, you cannot use those same expenses toward the American Opportunity Tax Credit, Lifetime Learning credit, or any other credit or deduction.
However, if your scholarship is not tax-free, it generally would be wages or other earned income, meaning there is no tax advantage to them. Since they’re not already tax-advantaged, you can use the education expenses paid for by the scholarship to claim an education credit.
This article does not constitute legal, financial, or tax advice. For help regarding your situation, please consult your local tax advisor.