Scholarship, Work Study Funds Subject to Taxation Rules

Jennifer Bernardo

Students who receive financial aid through work study jobs or scholarships may be unaware that they need to file tax forms by the April 16 deadline.

Confusion exists among some as to what constitutes taxable and non-taxable income. The IRS may consider scholarships and monies received through work-study programs as taxable income, even if the student does not receive a W-2 Form.

A scholarship is a benefit paid to a student at an educational institution to aid in the pursuit of course of study. Scholarship recipients must be a candidate for a degree to be able to exclude parts of grants used for tuition and fees for enrollment, or books, supplies and equipment required for the courses taken. A candidate for a degree is a full or part-time student who is pursuing a degree at a college, a university, or an accredited educational institution.

If the scholarship is used for other expenses, such as room and board, then that amount is considered taxable income. Other incidental expenses such as travel, research, clerical help and equipment are not tax-free. For example, monies used for suggested supplies as opposed to required supplies are not qualified scholarship expenses.

Some scholarships require students to work as a condition to receive a scholarship. For example, a student may have to work as a part-time teaching assistant in order to receive a scholarship of $2,500. If the student spends $1,500 of the scholarship in tuition, fees, books and supplies, the IRS requires the remaining $1,000 received to be filed as taxable income.

Lastly, scholarship prizes won in a contest are taxable if they are not used for education.

Students may also earn income through the work-study program, which allows for work campus to supplement educational expenses. Money earned through work study should be filed as taxable income, as with any other job, said Pat Hurley, Assistant Dean for Financial Aid. The only difference, Hurley said, is that students are able to exclude work-study funds from their regular income when they file for financial aid in the following school year.

Students must include the taxable amount of their scholarship on Line 1 in the 1040EZ Form. Any taxable amounts that are not reported on a W-2 Form can be entered on Line 1 with the letters SCH next to it. The same can be done for 1040A or 1040 Forms on Line 7.

The due date for filing federal tax returns is April 15 and is automatically moved to the next business day if it falls on a Saturday, Sunday, or legal holiday. Tax returns are considered filed on time if they bear an official postmark dated by midnight of the due date.

To order free publications and forms, ask tax questions and get more information, call the IRS at (800) 829-1040.