Caveat Emptor or Buyer Beware 21: Tax Implications from Financial Aid

Saturday’s we share a tip or caution to facilitate getting scholarships or avoiding problems

John worked hard to get scholarships, grants, and other financial aid. He worked with his high school guidance counselor, his mother, and several of our coaches. As a result, he earned $310,000. He only used $168,000, because he did not go to three of the schools that gave him money. Luckily he earned the money over a three and a half year period, but received it all in one year. He and his parents forgot about the tax implications of the money he received.

Tax-Free Portion of Scholarships

We are not tax experts and encourage you to consult with certified professionals. The Internal Revenue Service states

“A scholarship is generally an amount paid or allowed to a student at an educational institution for the purpose of study. Qualified scholarship and fellowship grants are treated as tax-free amounts if the following conditions are met:

• You are a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and
• Amounts you receive as a scholarship or fellowship grant used for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses at the educational institution.”

Portions of Financial Aid Considered  Income

“You must include in gross income amounts used for

• Incidental expenses, such as room and board, travel, and optional equipment
• Generally payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant
• You must include in income any part of the scholarship or fellowship that represents payments for services
• Generally, report scholarship income on the ‘Wages, salaries, tips, etc.’ line of your tax return
• Review instructions on your tax form to determine how to report any income from scholarships

For more information refer to Publication 970, Tax Benefits for Education.”

Tuesday we will share Electronic Document Scholarship Foundation as a source of money

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