So, you’ve now been awarded a college grant? Congratulations champ! Now, the next question is, do you have to pay taxes on college grants?
If you have to pay taxes on your grants, you may feel a bit hard done by! After all, the grant money was meant to aid your education, and may not even cover your full college tuition.
So, why would anyone still wan you to part with any percentage of the money?
The truth is, you may or may not need to pay taxes on grants, based on certain criteria, and we will explain everything in this article.
We’re here to help you understand the tax laws that govern college grants and other financial aid.
Remember that, your concern is that, do you have to pay taxes on college grants in America. So, read on as we do justice to that!
Do You Have To Pay Taxes On College Grants?
The answer to this question is a two-fold, as we will now explain. Normally, scholarship, grants and fellowships are not taxable, albeit under certain conditions.
First, there are two types of grants, which are: need-based and merit-based.
Now, the vast majority of scholarships and grants are need-based. Meaning that the government or the school awarding the funds is looking at your financial situation to determine if you qualify for assistance.
Merit-based awards are usually given to students with exceptional grades or other achievements. For the most part, you don’t have to pay taxes on either type of grant. However, there are a few exceptions. Some need-based grants can be taxed if they are considered income, and some merit-based scholarships can be taxed if the money is considered income and not a scholarship.
What this means is that, regardless of your grant or scholarship category, it is still taxable if you don’t fulfill the criteria for non-taxation.
More importantly, it does not matter where the grant money comes from, it may still be taxable. Whether it is from the federal or state government, or from private organizations and colleges, your grant money is taxable ad non-taxable.
Non-taxable as long as it is used only for IRS approved expenses, and taxable if it is thought of income.
How Can My Grant Money Be Considered Income?
The taxation laws of the US Internal Revenue Service (the agency charged with the collection of taxes in the US) are very clear on issues relating to grant and scholarship money. Grants and scholarships are not taxable, meaning that they are not considered to be part of your gross income. And the grant is considered not part of your gross income if:
The grant money award does not exceed your normal education expenses, such as tuition.
The scholarship or grant is not paid as compensation because you teach, research or perform other paid tasks at the awarding institution
However, if the grant or scholarship is for a certificate program that will not lead to a degree, the entire scholarship money is taxable.
What Are Approved Education Expenses?
According to the IRS, a scholarship or grant will be not be taxable if it does not exceed your approved expenses. Meanwhile, your approved expenses, in this regard, is the amount you need to cover your education expenses alone. A breakdown of your approved expenses will be:
- Your tuition as well as mandatory enrollment fees from your school
- Other essential expenses relating to your learning. Such fees could be in the form of textbook costs, materials, lab fees etc. Such essentials must however be essential to your day-to-day learning, for it to count.
What Is Not An Approved Education Expense?
In college, you spend more than just tuition. There are other mandatory fees that you must pay, like transportation, room and board, and so on.
Now, these expenses are part of what keeps your education running, but it is not part of your approved expenses. So, if you use any part of your college grant or scholarship for any of those expenses, you must pay tax on it.
This applies to every kind of grant or scholarship, regardless of the identity of the awarding institution.
To put it more into perspective, this it how it may play out for you. If you get a grant worth $5,000, and you use $3,400 to cover your tuition and other approved expenses, and then spend the remaining $1,500 on rent and transportation to your campus, you will not be asked to pay tax on the $3,500, but will pay tax on the $1,500.
Why Do People Have To Pay Taxes?
People have to pay taxes because the government needs money to operate. Taxes are the primary way that the government raises money, and it’s important that everyone pays their fair share.
There are a number of different types of taxes, and each one serves a specific purpose. Income taxes, for example, help fund public services like healthcare and education.
Just as sales taxes help pay for public infrastructure, like roads and bridges. And property taxes help fund local services like police and fire protection. Paying taxes is an important part of being a responsible citizen, and it’s something we should all take seriously.
What Can You Do To Get Around Paying Taxes?
As with any matter that relates to taxes, the answer isn’t straightforward. And our advice is that, YOU SHOULD NEVER TRY TO EVADE TAXES!!!
No matter how small the tax money is, evading taxes equals you taking away the future of other Americans. And it also makes you a criminal in the eyes of the law.
However, there are a few things you can do to try and reduce the amount of taxes you have to pay on your college grant money.
First, check to see if your grant money is taxable in the first place. Not all grants are taxable, so it’s worth checking. If it is not taxable according to the criteria we stated before, then you do not need to pay.
On the other hand, if it is taxable, you may be able to claim part of it as a deduction on your tax return.
Another option is to try setting up a college savings account specifically for your education expenses. This will help reduce the taxable income on your grant money and could save you some serious dollars come tax time.
How To Claim Your Taxes If You Do Pay Them
If you do have to pay taxes on your college grant, don’t worry! There are a few ways to claim them on your tax return. You can either take the standard deduction or itemize your deductions. If you choose to itemize, you have the option of deducting your education expenses.
Just be sure to keep track of all your receipts and documents, so you can accurately report them when it is time to file.
To do this, you will need to fill the tax return form below.
Finally, you now know more about grant and scholarship taxation. You also know more about you can reduce your grant taxation costs if you do have to pay it. We hope this eases your college journey!
Again, when you started reading this post, your concern was that, do you have to pay taxes on college grants?
We hope that we have dealt with that concern by clearing your doubts! But, if after this, you still have any lingering questions, be sure to consult a tax professional!