21 Oct My kid dropped out of college. Is her scholarship taxable?

Q. My daughter received a scholarship, part of which is taxable. It went straight to the school and was never in her hands. Then she decided to withdraw halfway through the semester. Is the scholarship money still going to be taxed and if yes, how much?
— Parent

A. There’s a lot to learn about scholarships and how they’re taxed.

A scholarship is tax-free only to the extent it is used to pay for tuition and fees required to attend the school or fees, books, supplies and equipment required of all students in a course.

Any amounts used to pay for room and board and a stipend for living expenses is taxable, said Gail Rosen, a Martinsville-based certified public accountant.

She said assuming the funds went directly to the school, the school should have a policy on what to do in your case.

“Depending on the policy of the school regarding early withdrawal, the scholarship will be taxable,” Rosen said. “The fact that your daughter left school halfway through the semester should not change the IRS rules above, but I would contact the school to see how they are going to handle a proration of taxable amount and the tax forms they send her.”

Also note that the Trump tax plan changed how these scholarship dollars are taxed. They’re now taxed at the higher trust and estate tax rate, so it may cost you more.  Congress is talking about lowering that tax, but if hasn’t happened yet.

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This story was originally published Oct. 22, 2019.

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