When a scholarship is tax-free
To exclude scholarship money from income, you need to be a degree candidate, enrolled in a program leading to a degree or recognized credential at an eligible school. The tax-free portion is limited to:
- Tuition
- Required fees
- Books or equipment your course requires
When a scholarship becomes taxable
Room and board, travel, and optional supplies are always taxable, even though they’re real costs of attending school. Any portion paid as compensation for required teaching or research is treated as wages, reported on a Form W-2, and taxed like a paycheck.
Use the IRS scholarship taxability tool if you’re unsure whether your scholarship income is taxable.
A quick example
Say you get a $15,000 scholarship, and tuition and required fees total $8,000 (which isn’t taxable).
$15,000 - $8,000 (tuition and fees) = $7,000
If that remainder covers a dorm room and meal plan, it’s taxable income you report on your return, even though your school may frame the full $15,000 as “financial aid.”
How scholarships interact with the kiddie tax
For the standard deduction and filing-requirement test, taxable scholarship money counts as earned income. But for the kiddie tax, which taxes a dependent’s unearned income at higher rates, any taxable scholarship not reported on a W-2 counts as unearned income instead. A student with a large room-and-board scholarship could owe kiddie tax with no investment income at all.
How to report taxable scholarship income
You’ll report scholarship income on Form 1040 even without a 1098-T or W-2.
Note: Write “SCH” and the amount next to the wages line.
