04 Aug Is scholarship money taxable?

Q. My son received scholarships from three non-profits. How does the IRS know it’s a scholarship and not income to him?
— Parent

A. Congratulations to your son on his scholarships.

This is a very rewarding moment that can take some of the financial burden of college off of your shoulders.

When thinking about how the IRS will recognize the receipt of scholarship money, the most important question to ask yourself is whether the scholarship is taxable or not, said Eric Furey, a certified financial planner with RegentAtlantic in Morristown.

He said the IRS states that a taxable scholarship should be documented as regular income, while a tax-free scholarship isn’t recognized as income and therefore doesn’t need to be reported.

The first and most important rule is that scholarships awarded to students who are not enrolled in, or a candidate of, a degree program are always taxable, Furey said.

“If you son is enrolled in a degree program then the next layer of determining how much, if any, of the scholarship is taxable is to examine what the money is being used for,” he said. “Any amount of the scholarship that is used on qualified expenses is tax-free, with the rest being taxable.”

Qualified expenses are limited to tuition, fees, books, and supplies required for courses, Furey said, while expenses related to costs such as room and board, or travel, are not qualified and will therefore be taxable.

This means that your son’s scholarships can be either completely taxable, tax-free, or a mix of both.

It is important to keep in mind you only report the part that is taxable if the scholarship is both, said Scott Danziger of RegentAtlantic in Morristown.

“Be sure to keep any tax documents sent to you from the scholarship and provide those documents to your accountant,” Danziger said. “Additionally, keep copies of the receipts of the expenses incurred that were paid for with the scholarship money.”

This will make reconciling the source and use of the funds easier when it comes time to file your taxes, he said.

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This post was first published in August 2016.