Is financial aid taxable?
With summer coming to an end, you or your children or grandchildren may be headed off to college during the next couple of months. Earning a college degree opens so many doors, but of course, it comes with significant expenses. Thankfully, many colleges and non-profits offer financial support to help off-set these expenses. Even still, you may be wondering, is financial aid taxable?
It depends.
If it is gift aid, it is likely tax free. Gift aid includes free-money scholarships as well as many grants and fellowships. These forms of financial aid will remain tax-free as long as the recipient is pursuing a degree, the funds are undesignated or tagged for tuition or related expenses, and the recipient can prove that the cost of attendance is equal to or exceeds to the amount of the gift aid.
If the amount of gift aid, tuition reduction or discount, or university grant exceeds the cost of tuition and related expenses, the remainder is taxable. For example, if your student collects $45,000 in grants and scholarships, but the cost of tuition and other mandatory fees is $40,000, the remaining $5,000 – even if it is going towards such costs as room and board – is taxable.
Any money contingent on student work is taxable. These include work studies as well as some gifts called “grants” or “scholarships,” but are actually contingent on the student working in some capacity for the university.
For the remaining taxable income, there are a number of exemptions and deductions available to students, depending on their dependency status.
| If the student is a dependent… | If the student is not a dependent… |
| No personal exemption | Personal exemption: $4,000 in 2015 |
| Standard deduction: $6,300 for students filing single in 2015 | Standard deduction: $6,300 for students filing single in 2015 |
| American Opportunity tax credit (up to $2,500) or Lifetime Learning tax credit (up to $2,000) |
Source: www.marketwatch.com
