Congratulations on Your Scholarship. Don't Forget to Pay Uncle Sam

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A new school year has started and many families have dropped their children off at college. While the schools supplies are purchased and your family has slipped back into a normal routine, you may have a little more work to do if your son or daughter is the recipient of any scholarships or fellowships. To ensure your child is starting off on the right foot with the IRS, you should review the taxation rules on scholarshipsand fellowships.

A scholarship is an amount paid for the benefit of attending an educational institution and a fellowship is an amount paid to an individual to aid in the pursuit of study or research. A scholarship or fellowship is tax free only if:

  1. The individual is a candidate for a degree at an eligible educational institution; 
  2. The money is used to pay for a qualified education expense; and 
  3. It does not represent payment for teaching, research, or other services required as a condition for receiving the scholarship. Qualified education expenses include tuition and fees required to enroll or attend the institution and course-related expenses, such as fees, books, supplies, and equipment required for the courses.

Expenses that do not qualify include amounts paid for room and board, travel, research, clerical help or equipment that is not required for the coursework. Take some time to review the rules, and next spring, make sure your child files a tax return and pays any taxes that are due. While your child may graduate with student loan debt, they won't have the burden of tax debt as well.