While you are scrambling to get as much scholarship money as possible, it is not a bad idea to consider how winning awards will affect your tax situation. What many students don’t realize is that a great deal of scholarship money can be considered taxable income, depending upon what it is awarded for and how it is used. For instance, scholarships used to cover tuition, books, required equipment, and fees is not taxable, but scholarships received as payment for service such as teaching and research is considered taxable income.
Many scholarships let you decide how they will be applied. Since it will be tax-free, you may immediately think that applying all funds to tuition, books, and fees is the best choice. You must realize, however, that this decision will affect your ability to claim the American Opportunity or Lifetime Learning tax credits. These credits are given based on how much you pay in qualified fees and tuition. The more of these costs that are covered by scholarships, the less you pay and the lower your credits. If you are unsure which approach is best for you, consult a tax professional before making a final decision on applying your scholarship funds.
If you can apply your scholarship money any way you wish and you fall within the income limits for taking tax credits, consider the tax implications of all approaches to figure out which option is most profitable for you. First, you should consider applying the money to tuition. Next, see how it affects you to apply the money to room and board. This may require you to pay income tax on the scholarship money, but will allow you to take credits on all tuition expenses.
Figuring the benefits of each approach may be difficult, even if your general tax return is extremely simple. Since the savings of tax credits may be as much as $2,500 in certain cases, however, it is well worth the time to consult a tax professional or CPA before making any major decisions. After all, since money is on the forefront of most college students’ minds, making the most of tax advantages regarding tuition and scholarships can make a world of difference, especially when those benefits are considered over the duration of your college degree program.