Answer - Are Scholarships Tax Free

You should always double check with a qualified tax advisor.   However, scholarships for tuition and fees are generally tax free.  Scholarships for room, board and other expenses are generally taxable to the student. 

Depending on your overall financial situation it actually may be more beneficial to take the scholarship taxable to the student.  Students typically are in a much lower tax bracket than their parents.  If the student takes the scholarship as taxable it may allow the parents to utilize an educational tax credit!  This is especially true with the American Opportunity Credit that has been expanded to include a lot more Indiana tax payers.  You can make up to $180,000 if you file a joint return and still claim a portion of the credit. 

I will caution you that most colleges and universities will first apply scholarship money towards tuition.  The majority of scholarships are non-restrictive meaning they can be used for anything.  Most people assume that the scholarship needs to be used toward tuition because that is how the school applies it or it says tuition scholarship on an award letter.  Again, most scholarships can be designated by the parents and student.  Many people fail to realize this and it can cause them to lose out on $2500 from Uncle Sam.

For more information on how this applies to your specific situation call or email us.