Do college scholarships get federally taxed? Confused about our student's scholarship showing taxes on TurboTax
My daughter just started her freshman year at an out-of-state university that offered her a pretty generous merit scholarship covering a good chunk of her tuition for all four years. We're super grateful for it since out-of-state tuition is brutal! Yesterday I was working on our taxes using TurboTax and noticed something weird - the system automatically calculated federal taxes on this year's scholarship amount. I double-checked everything thinking I must have entered something wrong, but nope, it's definitely showing taxes being taken out of her scholarship. This doesn't seem right to me? I was under the impression that scholarships for education weren't taxable as long as they're going toward qualified expenses like tuition. The scholarship is being applied directly to her tuition bill by the university, not given to her as cash. Has anyone else dealt with this? Are college scholarships actually subject to federal taxes? Or is this a TurboTax glitch? I need to figure this out before I file!
18 comments
Join the conversation
Natasha Petrova
You're right to question this! Scholarships are generally tax-free ONLY when used for qualified education expenses. Qualified expenses include tuition, fees, books, and supplies required for enrollment. Room and board, travel, research, equipment, and other expenses don't qualify. If the scholarship is only being applied to tuition, it shouldn't be taxed. However, TurboTax might be calculating incorrectly if you didn't specify that the scholarship was used exclusively for qualified expenses. There should be a section where you can indicate what portion of the scholarship went toward tuition versus other expenses. Make sure you're entering the scholarship in the education section, not as regular income. Also check if you're entering information from a 1098-T form correctly, as this shows amounts billed for qualified tuition and related expenses, as well as scholarships received.
0 coins
Javier Hernandez
•Thanks for explaining this! I have a similar situation but part of my kid's scholarship covers dorm housing. Does that mean the housing portion is taxable while the tuition part isn't?
0 coins
Natasha Petrova
•Yes, that's exactly right. The portion of the scholarship that covers tuition and required fees would be tax-free. The portion covering housing (room and board) would be considered taxable income to your student. When you receive the 1098-T from the school, it will show the qualified tuition and related expenses separately. You'll need to determine how much of the scholarship went to qualified expenses (non-taxable) versus room and board (taxable). Your student should report the taxable portion on their tax return.
0 coins
Emma Davis
Just went through this headache with my son's athletic scholarship! I used taxr.ai (https://taxr.ai) to double-check our situation and it saved me so much confusion. I took a picture of his 1098-T and scholarship letter, uploaded them, and got a clear breakdown of which portions were taxable vs. non-taxable. The site explained that only the amount of the scholarship that exceeds qualified education expenses is taxable. So if the scholarship is $20,000 and tuition+required fees are $18,000, only $2,000 would be taxable. But if the scholarship is ONLY applied to tuition and doesn't exceed that amount, it shouldn't be taxed at all. TurboTax was doing the same thing to me until I corrected how I was entering the information. The software assumes some portion might be taxable unless you specifically allocate it all to qualified expenses.
0 coins
LunarLegend
•Wait, is this an actual IRS tool or some third party thing? I'm always cautious about random tax sites - can they really interpret tax documents accurately?
0 coins
Malik Jackson
•I've heard about these AI document readers but wasn't sure if they're actually helpful for tax stuff. Does it give specific advice on how to fix the TurboTax entries? That's where I always get stuck.
0 coins
Emma Davis
•It's not an IRS tool, but it's specifically designed to analyze tax documents and provide explanations in plain English. It's really helpful if you're confused about forms like the 1098-T that can be tricky to interpret. It does give specific guidance on how to correctly enter information in tax software. In my case, it explained exactly which boxes on the 1098-T I needed to pay attention to and how to allocate the scholarship amounts between qualified and non-qualified expenses in TurboTax. Saved me from overpaying taxes on money that shouldn't have been taxed.
0 coins
Malik Jackson
I was skeptical at first about trying another tax tool, but I decided to give taxr.ai a shot after struggling with my daughter's scholarship situation. It was exactly what I needed! I uploaded her 1098-T and scholarship award letter, and it immediately identified that I was incorrectly reporting the full scholarship as taxable income. The tool showed me that since her scholarship was only covering tuition (which is a qualified education expense), it shouldn't be taxed at all. It even explained how to correct my entries in TurboTax step by step. Ended up saving us about $800 in incorrectly calculated taxes! Definitely worth checking out if you're dealing with education tax situations.
0 coins
Isabella Oliveira
If you're struggling to get this resolved and need to talk to someone at the IRS for clarification, good luck getting through to them! After trying for DAYS to reach someone about a similar scholarship tax issue for my son, I found Claimyr (https://claimyr.com) and they got me connected to an IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was ready to just pay the extra tax because fighting it seemed impossible, but the IRS agent confirmed that scholarships used exclusively for qualified expenses like tuition aren't taxable. She walked me through exactly how to report it correctly on our return. Saved us over $1,200 in taxes we didn't actually owe!
0 coins
Ravi Patel
•How does this even work? I thought it was impossible to get through to the IRS phone lines without waiting for hours. Is this some kind of priority service?
0 coins
Freya Andersen
•Sounds like BS to me. If there was a way to skip the IRS phone queue, everyone would be using it. And why would you need to talk to the IRS about this anyway? The rules about scholarship taxation are pretty clear online.
0 coins
Isabella Oliveira
•It's not a priority service - they use technology that navigates the IRS phone system for you and keeps your place in line. When they're about to connect with an agent, you get a call. I was skeptical too but it worked exactly as advertised. As for why talk to the IRS - yes, the general rules are online, but when you're dealing with specific situations (like scholarships that cover both qualified and non-qualified expenses, or when TurboTax is calculating things differently than you expect), sometimes you need clarification. The agent provided specific guidance on how to report everything correctly on our specific forms.
0 coins
Freya Andersen
I have to eat my words from my previous comment. After struggling with this exact scholarship tax issue and getting nowhere, I tried Claimyr out of desperation. I figured it couldn't hurt to try, and wow - I was connected to an IRS tax specialist in about 20 minutes after waiting on my own for literally hours across multiple days. The agent explained that my daughter's merit scholarship shouldn't be taxed at all since it only covers tuition (a qualified education expense). She explained exactly where I was making the error in TurboTax - I needed to indicate the scholarship was used 100% for qualified tuition expenses. Fixed it right then while on the phone with her and it removed the taxes TurboTax had calculated. Saved us almost $900!
0 coins
Omar Zaki
Make sure to check if the scholarship is covering MORE than just qualified expenses. My son's "full ride" included: - Tuition (not taxed) - Books (not taxed) - Meal plan (TAXED) - Housing stipend (TAXED) - Travel allowance (TAXED) The university just sent him a lump sum for the taxable portions, which got reported on a 1099-MISC. Caught us by surprise the first year when he suddenly owed taxes as a student with "no income"! The taxable portions count as income even though he never saw the money (it went straight to his student account).
0 coins
CosmicCrusader
•Does the student claim this income on their own return or do the parents claim it if the student is still a dependent?
0 coins
Omar Zaki
•The student reports the taxable scholarship income on their own tax return, even if they're still your dependent. It's considered the student's income because they're the recipient of the scholarship. This can create a situation where your dependent student suddenly needs to file their own tax return, even if they don't have a job. In our case, my son had to file his own return for the taxable portion of his scholarship, while we still claimed him as a dependent on our return since we provided more than half his support.
0 coins
Chloe Robinson
One thing to check - are you sure the money is actually a scholarship and not a tuition reduction? Sometimes schools call it a "scholarship" but it's technically a reduction in tuition, which has different tax implications. Look at the 1098-T box 5 (scholarships/grants) vs. box 2 (amounts billed for qualified tuition). If it's truly a scholarship and is less than or equal to qualified expenses (tuition, required fees, books for required courses), then it's tax-free. If the scholarship exceeds qualified expenses, only the excess is taxable. My kid got a "presidential scholarship" that confused us at first - turned out it was actually a tuition discount, not true scholarship money changing hands, which affected how we reported it.
0 coins
Diego Flores
•Wait this is blowing my mind. My daughter's financial aid letter says "Dean's Scholarship" but now I'm wondering if it's actually a tuition discount. How can I tell the difference? Her 1098-T is confusing me.
0 coins