Are Scholarships Taxable? A Complete 2025 Guide for Students and Parents

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Are Scholarships Taxable? A Complete 2025 Guide for Students and Parents

Scholarships are a beacon of hope for students and families striving to afford higher education. With the rising cost of college tuition, room and board, books, and other expenses, scholarships help bridge the financial gap. But a question that often arises—and rightly so—is: “Are scholarships taxable?” The answer is more nuanced than a simple yes or no. It depends on the type of scholarship, what the funds are used for, your student status, and how the money is spent.

In this comprehensive guide, you’ll learn everything you need to know about scholarship taxation rules in the United States for 2025, including how to legally minimize taxes, when you need to report scholarship money to the IRS, and what exceptions apply.

Let’s break it down.

What Is a Scholarship?

A scholarship is free money awarded to students based on academic achievement, talent, financial need, athletic performance, community service, or other criteria. Unlike student loans, scholarships do not have to be repaid.

Scholarships may come from:

  • Colleges and universities
  • Private organizations
  • Government agencies
  • Nonprofits
  • Corporations
  • Religious groups

Depending on the provider and your use of funds, some scholarship income may be considered taxable by the IRS.

Are Scholarships Taxable in 2025?

The Short Answer:

Scholarship money is generally NOT taxable if it is used for qualified education expenses and you’re a degree-seeking student.

The IRS says a scholarship is non-taxable if:

  • You are enrolled in a program that leads to a degree (undergraduate or graduate).
  • The funds are used for qualified education expenses, such as:
    • Tuition
    • Required fees
    • Required books
    • Required supplies and equipment

A scholarship is taxable if:

  • It is used for non-qualified expenses, such as:
    • Room and board
    • Travel
    • Research
    • Health insurance
    • Optional supplies
    • Stipends not tied to tuition

What Are Qualified Education Expenses?

According to the IRS Publication 970, qualified education expenses include.

If your scholarship only covers items from the left-hand column, you don’t owe tax. If any money is used for items in the right-hand column, that portion is taxable income.

Example Scenarios

Example 1:

Maria wins a $10,000 academic scholarship. She uses:

  • $6,000 for tuition
  • $2,000 for required books
  • $2,000 for housing

Taxable amount: $2,000 (used for housing)

Example 2:

James receives a $15,000 athletic scholarship. He uses:

  • $10,000 for tuition
  • $5,000 for room and board

Taxable amount: $5,000

Are Fellowships and Grants Taxable?

Like scholarships, fellowships and grants are taxable if the funds are used for non-qualified expenses.

Graduate students often receive stipends through fellowships that cover:

  • Living expenses
  • Health insurance
  • Research projects

These are taxable and must be reported as income.

Do You Have to Report Scholarships on Your Tax Return?

 

Yes, you must report taxable portions of scholarships or grants on your federal tax return using Form 1040.

Here’s how to do it:

  • Form 1040, Line 1: Include taxable scholarship income (noted as “SCH” next to it).
  • Form W-2: If your scholarship includes a work component (like teaching or research), you might receive a W-2 form, and that income must be reported.

IRS Guidelines on Scholarships

The IRS provides clear rules on how to treat scholarships. Refer to:

  • IRS Publication 970: “Tax Benefits for Education”
  • IRS Topic No. 421: Scholarships, Fellowship Grants, and Other Grants

These resources outline the tax treatment of various educational financial aid types, including:

  • Scholarships
  • Fellowships
  • Fulbright grants
  • Employer tuition assistance

How to Minimize Taxes on Scholarships

You can legally reduce your tax burden by following these strategies:

1. Track Your Expenses

Keep receipts for:

  • Tuition payments
  • Required books and supplies
  • Fee statements from your college

2. Use Scholarship Funds for Qualified Expenses First

Prioritize spending scholarship money on tax-free items.

3. File Taxes Accurately

Even if you’re a dependent or a student, you may still need to file. Filing correctly ensures you don’t overpay taxes.

4. Consult a Tax Professional

Especially for students with fellowships or complex scholarship packages, it’s best to consult a CPA or tax advisor.

Scholarships That May Be Fully Taxable

Some scholarships or awards may be fully taxable, including:

  • Awards given for general recognition (not tied to education)
  • Employer scholarships with strings attached (e.g., you must work for them)
  • Prizes labeled as scholarships but used for personal expenses

What About International Students?

International students studying in the U.S. may be taxed on scholarships based on tax treaties between the U.S. and their home country.

Key points:

  • Some scholarships may be subject to 14% federal withholding.
  • You may need to file Form 1040-NR and Form 8843.
  • Tax treaties can reduce or eliminate this tax—check the IRS website or consult your school’s international office.

Do States Tax Scholarships?

In most cases, if a scholarship is not taxed federally, it is also not taxed by states.

However, each state has its own tax laws. Popular tax-friendly states for students include:

  • Florida
  • Texas
  • Nevada
  • Washington

If you live in a state with income tax, consult your state’s revenue office for specific rules.

Will the Scholarship Provider Send Me a Tax Form?

You may receive:

  • Form 1098-T: Issued by your school showing tuition and scholarships received
  • Form 1099-MISC: If the scholarship is considered taxable income
  • Form W-2: If your scholarship involved work, like teaching or research

Keep these documents for your records and include them in your tax filings.

Scholarships and FAFSA (Is It Counted as Income?)

Even though scholarships can affect your Expected Family Contribution (EFC) or Student Aid Index (SAI) on FAFSA, they are NOT counted as income in the traditional sense.

However, you must report scholarships received on your FAFSA:

  • If they reduce your financial need
  • If they exceed your cost of attendance

Scholarships and Financial Aid: How Taxes Affect You

Some students may receive financial aid packages that include:

  • Grants
  • Scholarships
  • Work-study
  • Loans

Taxable scholarships can reduce your eligibility for need-based aid if they push your income above certain limits. This is why it’s crucial to understand the tax implications and report scholarships correctly.

Tax Software for Students

Consider using tax filing software that supports education-related forms:

These tools help track scholarships, apply education credits, and avoid IRS mistakes.

Education Credits That Help Offset Taxes

You may qualify for education tax credits, which can reduce the amount of taxes you owe, such as:

1. American Opportunity Credit (AOTC)

  • Up to $2,500 credit
  • For the first 4 years of college
  • Partially refundable

2. Lifetime Learning Credit (LLC)

  • Up to $2,000 per return
  • For graduate students or part-time students

If you use scholarships for non-qualified expenses and pay out-of-pocket for tuition, you can still claim credits for the amount you paid.

Summary: Are Scholarships Taxable?

Conclusion

While most scholarships are not taxable, you must be cautious. The IRS requires any non-qualified use of scholarship funds to be reported as income. That means if you use part of your scholarship to pay for housing or meals, that portion could be taxed.

By tracking your expenses, planning ahead, and reporting accurately, you can avoid penalties and potentially save thousands of dollars in unnecessary taxes. Understanding how scholarships interact with the IRS rules is key to protecting your finances.