Paying for college can be expensive whether you are attending a public or private institution. If you receive financial aid, it is important to know under what circumstances, if any, those funds are subject to taxation. Knowing this information can help you take advantage of tax benefits established by the U.S. government, as well determine what considerations you have to make when filing your taxes for the year.
Identification
Financial aid includes loans, scholarship and fellowship monies that are awarded for educational expenses, including tuition, laboratory fees, room and board, and books.
Function
Some financial aid is subject to taxation. However, financial aid is typically tax-free if the money is awarded and then used to cover tuition, fees, books, supplies and equipment. Expenses such as room and board and stipends used for living expenses are all taxable.
Expert Insight
Education expenses will generally be higher in a student's first and last years. Generally speaking, tax year one includes the fall semester. The last tax year includes only the spring semester.
Benefits
The IRS Publication 970 outlines tax benefits for scholarships and fellowships, as well as which work-related educational expenses can be deducted at tax time. Tax benefits for education include the Hope Scholarship and Lifetime Learning Tax Credit, Coverdell Education Savings Accounts, and section 529 prepaid tuition and college savings plans. Considerations for international students will vary and should be researched thoroughly. The 519 U.S. Tax Guide for Aliens, Form W-4 Employee's Withholding Allowance Certificate, W-7 Application for IRS Individual Taxpayer Identification Number and 1040-C U.S. Departing Alien Income Tax Return are important documents international students will need to file regarding financial aid received while in the United States.
Considerations
Federal and state educational grants constitute a type of scholarship that is earmarked to cover tuition and education-related expenses, and is not subject to taxation. It is important to note that all federal and state educational grants must be used expressly for tuition to qualify as nontaxable income. As outlined by IRC section 108(f), student loans are also considered non-taxable income.
Tags: subject taxation, cover tuition, educational expenses, educational grants, international students