01 Dec Remember That Some Forms of Student Aid Are Taxable
Researching and applying to the various forms of financial aid for college can seem like a full-time job. Even so, students and parents often do not realize that some forms of student aid are taxable. In this post, Accolade Financial reviews some of the most common forms of student financial aid and whether the student or parents needs to claim it as income received.
Grants, Scholarships, and Fellowships
The Internal Revenue Service (IRS) considers these forms of financial aid to be gift aid. Typically, the organization providing gift aid sends it directly to the college you indicated you would be attending to cover tuition and other fees.
The school’s financial aid administrator issues you a refund for any portion of the gift aid not needed to cover tuition and fees. According to the IRS, any money refunded to you from a grant, scholarship, or fellowship is income and therefore taxable.
Taxes on Work-Study Income
Work-study opportunities are often available as part of a financial aid package, but that does not mean your school will have a suitable position for you. If you do participate in a work-study program, the college is your employer. As your employer, the college deducts federal, state, and social security taxes from your work-study earnings.
Your college should issue you a W2 for your work-study income by January 31 of the next calendar year. You must report this income on your tax return if you file as an independent taxpayer. If your parents still claim you as a dependent on their annual tax return, they should be certain to include any income you earned during the previous year. This includes gift aid refunds and money earned from a work-study program.
Most students find that they still have educational expenses after exhausting all gift aid options. You can apply for student loans backed by the federal government if you need additional funding. Because this money is a loan you must repay and not a gift, the IRS does not consider it income nor is it taxable.
You may qualify for a Lifetime Learning Credit of up to $2,500 on your tax return next year if you meet certain qualifications. If your parents claim you as a dependent, they can apply for the tax credit even if you intend to repay all student loans yourself.
Determining Your Taxable Income
Each college you attend should send you a 1098-T form that reports how much the school billed you for tuition and fees along with any grants, scholarships, or fellowships applied against it. You never have to pay tax on tuition, books, and other supplies needed for college. However, any gift money spent on housing, food, or personal purchases is taxable and you must report it. Keep in mind that you must be working towards a degree or all gift money that you receive is taxable.
Please contact Accolade Financial with additional questions or to request an appointment to discuss college financial planning in greater detail.