Scholarship money is taxable to the extent you spend it on anything other than tuition, required fees, and required course materials, and it’s tax-free only when you’re a degree candidate at a qualifying school and the money goes toward those qualified costs. The rule lives in Internal Revenue Code Section 117.1Office of the Law Revision Counsel. 26 U.S. Code 117 – Qualified Scholarships Anything above the qualified-expense line is ordinary income, and the IRS expects you to do the math yourself.
When Your Scholarship Stays Tax-Free
Two conditions have to hold at the same time. You must be a degree candidate at a school with a regular faculty, a set curriculum, and an enrolled student body, and the money must go toward qualified education expenses.2Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants If either condition fails, the amount that fails is taxable.
What the award is called doesn’t matter. The IRS treats “scholarship” and “fellowship grant” the same way for degree-seeking students. What matters is how you actually spend the money. A $15,000 grant that covers $10,000 of qualified costs leaves $5,000 of taxable income, regardless of the award’s label.2Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants
What Counts as a Qualified Expense
The list is narrower than most students expect. Qualified expenses include tuition, enrollment fees, mandatory student activity or technology fees required as a condition of attendance, and books, supplies, and equipment your courses specifically require.3Internal Revenue Service. Qualified Education Expenses A textbook on a syllabus counts. A laptop you bought for convenience usually doesn’t, unless the program explicitly requires every student to have one.
The list of what doesn’t qualify is longer. Room and board never qualify, whether you live in a dorm or off campus. Meal plans, travel, health insurance, transportation, and personal living costs are all excluded.3Internal Revenue Service. Qualified Education Expenses This is where most students end up with a surprise tax bill. A full-ride award that covers housing and meals along with tuition creates taxable income equal to the housing-and-meals portion.
Keep receipts, billing statements, and syllabi showing which items were required. The burden of proving that scholarship dollars went to qualified expenses falls on you. Without records, an auditor can treat the whole scholarship as taxable.
When the Entire Scholarship Is Taxable
Two situations make every dollar taxable, no matter how it’s spent.
The first is not being a degree candidate. Continuing education, professional development seminars, and any program that doesn’t lead to a degree take you outside the exclusion, and the full award goes into gross income even if part of it paid tuition.2Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants
The second is money paid for services. If your award requires you to teach, conduct research, or perform other work as a condition of receiving the funds, that portion is treated as wages.2Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants A graduate student receiving a $20,000 stipend for teaching two undergraduate sections owes tax on the full $20,000, even if the university applies it directly to tuition. The IRS sees labor, not a gift.
A few programs sit outside this rule. Payments through the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, and comprehensive student work-learning-service programs at designated work colleges are not treated as compensation even though they require service.
FICA on Teaching and Research Stipends
When a stipend counts as compensation, the next question is Social Security and Medicare tax. Students employed by the same school where they’re pursuing a degree often qualify for an exemption, as long as education, not employment, is the primary purpose of the relationship.4Internal Revenue Service. Student Exception to FICA Tax The school’s payroll office usually determines whether the exception applies. If it does, your stipend is subject to income tax but not the 7.65% FICA withholding.
Making Part of Your Scholarship Taxable on Purpose
This is the planning move most students miss. The American Opportunity Tax Credit is worth up to $2,500 per year for the first four years of undergraduate study and is partially refundable, but you can only claim it on qualified expenses that weren’t already covered by tax-free scholarship money.5Internal Revenue Service. Education Credits – AOTC and LLC
You’re allowed to choose to treat some scholarship money as taxable income instead of applying it to qualified expenses. Doing so frees up those expenses to count toward the credit. Say you receive a $10,000 scholarship and have $10,000 in tuition. Apply the full scholarship to tuition and your credit-eligible expenses are zero. Treat $4,000 of the scholarship as taxable and apply only $6,000 to tuition, and you now have $4,000 in expenses eligible for the AOTC. The credit on that $4,000 can be worth $2,500, while the tax on $4,000 of extra income for a student in a low bracket is often a few hundred dollars. Net savings can easily exceed $2,000.
The math depends on the student’s or family’s marginal rate, the size of the scholarship, and whether someone in the household is actually eligible to claim the AOTC (income phase-outs apply). Run the numbers both ways before filing. The Lifetime Learning Credit works on similar principles but tops out at $2,000 per return and only covers expenses paid directly to the school.5Internal Revenue Service. Education Credits – AOTC and LLC
The Kiddie Tax Trap for Dependents
Students claimed as dependents face an extra wrinkle. The taxable portion of a scholarship that isn’t reported on a W-2 counts as unearned income for the kiddie tax. For 2026, a dependent child with more than $2,700 in unearned income is taxed at the parent’s marginal rate on the amount above that threshold, not the child’s lower rate. The first $1,350 of unearned income is tax-free, and the next $1,350 is taxed at the child’s own rate.
A student whose scholarship covers a big chunk of room and board can easily have several thousand dollars of taxable scholarship income. If that income is taxed at a parent’s 24% rate instead of the student’s 10% or 12% rate, the bill is noticeably larger. Form 8615 is required when the kiddie tax applies. Compensatory stipends reported on a W-2 are treated as earned income and don’t trigger it.
Reporting the Taxable Portion
Where the income goes depends on how the school reported it. If the taxable scholarship shows up in Box 1 of a W-2, which is common for teaching and research assistantships, include it in wages on Line 1a of Form 1040. If it wasn’t reported on a W-2, put the taxable amount on Line 8r of Schedule 1, write “SCH” next to the entry, and the total carries to Line 8 of Form 1040.2Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants
Your school sends Form 1098-T showing tuition billed and scholarships disbursed. Treat it as a starting point, not a final answer. The 1098-T tracks money moving through the school’s system, but it doesn’t track how you spent funds received as a refund or stipend.6Internal Revenue Service. About Form 1098-T, Tuition Statement Calculating the taxable portion by subtracting qualified expenses from total scholarship funds is on you.
If part of your scholarship is taxable and nothing was withheld, you may need to make quarterly estimated payments to avoid an underpayment penalty. The IRS specifically flags this for scholarship recipients.2Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants Students who receive a large lump-sum scholarship each semester and owe tax on a slice of it should check the estimated-payment rules rather than waiting until April and picking up a penalty on top of the tax.
Do You Even Have to File?
Many students assume that because they’re dependents, no return is needed. Often that’s wrong. For the 2025 tax year (filed in early 2026), a single dependent under 65 must file if gross income exceeds the larger of $1,350 or earned income plus $450.7Internal Revenue Service. Check if You Need to File a Tax Return Earned income for this purpose includes taxable scholarship amounts, so even a modest taxable scholarship can push you over the threshold.
Filing voluntarily can still make sense if you fall below the threshold but qualify for a refundable credit like the AOTC. And state income tax is a separate obligation. Most states with an income tax follow the federal treatment of scholarships, but state filing thresholds vary widely, so check your state’s tax agency if any of your scholarship is taxable.
A Note for International Students
Nonresident alien students report differently. Taxable scholarship income is typically reported on Form 1042-S rather than a W-2 or 1098-T, and the return goes on Form 1040-NR instead of the standard 1040, with the taxable portion on Schedule 1, Line 8r of the 1040-NR.2Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants Tax treaties between the U.S. and many countries can reduce or eliminate the tax, but claiming a treaty benefit requires specific reporting. Your school’s international student tax office is usually the best first stop.