The U.S. government maintains a vested interest in helping students pursue higher education. One of the ways it encourages them to excel is by offering families tax relief when a student receives a scholarship to help pay college tuition. However, the tax exemptions come with very particular qualifications—it is important to be aware of the conditions under which awarded scholarship funds are tax-free, as well as when they are not.
At the most basic level, the IRS considers tax-exempt all scholarship money being used by a degree candidate towards tuition fees and supplies. A degree candidate is defined as a student currently attending any level of educational institution, from primary school through the university level. The institution itself must meet the following criteria:
- It offers a curriculum that awards credit leading towards a bachelor’s degree or higher, or provides a training program designed to impart skills leading to gainful employment in a recognized occupation.
- It has been authorized to offer said curriculum at either the state or federal level and has received accreditation from a recognized national agency.
IRS tax codes are specific: Only those funds used for tuition and required class materials are considered tax-free. Class materials that have only been recommended but not required may be purchased with scholarship funds, but those funds are then taxable. Similarly, any money used toward student lodging will not be considered tax-free, and any non-scholarship money—such as that received in the form of wages, even if the work done is a requirement to fulfill the terms of the scholarship-will also be taxable.