If you're a student who receives an educational grant, scholarship, fellowship or other type of financial assistance, you may not have to declare any of it as income on your tax return. However, that doesn't mean educational grants are always exempt from income tax. You might have to declare some or all of that money on your return if you don't use the funds properly or fail to satisfy the requirements.
Educational grants such as need-based Pell Grants, Fulbright grants and private scholarships are all taxed the same way. Grants that your employer offers, however, are subject to different rules that allow you to receive a maximum of $5,250 tax-free each year in some cases. That means you only have to declare amounts in excess of $5,250 as income. You can receive these grants tax-free if you're a degree candidate at an eligible school. However, educational grants can lose their tax-free status for amounts in excess of your qualified education expenses even if you satisfy those two requirements.
Tax law defines a degree candidate as any student who attends a primary or secondary school, enrolls in a college or university program that leads to a degree, attends a post-secondary school for which the credits can be applied towards a degree elsewhere, or who pursues certain accredited study programs. As a degree candidate the primary mission of the school you attend must be to offer formal instruction to students. It must maintain a faculty, offer educational curricula and regularly enroll students.
Educational grants are fully taxable if you're not a degree candidate, enroll at a school that isn't an eligible institution or use an entire grant to pay expenses that aren't approved. A grant can also be partially taxable if you use some of the funds to pay anything other than eligible school expenses. They include tuition, enrollment fees and the books, supplies and equipment required for your courses. If you're awarded a $10,000 grant and use $6,000 to pay tuition, $1,000 for textbooks and the rest for room and board, you have to declare that $3,000 as income. If part of your grant depends on providing services, such as taking part in a work-study program, some of it will be taxable as wages.
Whether you have to even file a tax return for the year you receive the grant depends on the amount of other income you earn and whether someone can claim you as a dependent. If you must file, report the taxable portion of the grant on the “Wages, salaries, and tips” line of your return and enter the letters “SCH” to the left of it.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.