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Use Scholarships Wisely to Dodge Federal Income Tax

Many people focus so much on high school expenses that they forget all available scholarships. When in school, scholarship funds are very helpful. Some scholarships also cover college and university education. For students pursuing Masters and PhD degrees, fellowships are what they get. These funds are not tax free, contrary to what many people think. They are also not a federal income to the person who has secured them. Taxation of these funds is determined by whether the student is studying or not and what the funds will eventually be used for.

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For scholarship funds to be tax-free, the beneficiary has to undertake study programs for which the scholarship was obtained. One has to spend the money on education matters exclusively Tax Expert. The expenses should for studies alone. Expenses that qualify include tuition fees, course-related expenses such as books, stationary, accessories, and equipment required for the study program.

All expenses undertaken by the student during the enrollment process do not count. If one pays the expenses using this money, one has to pay up on Federal income tax.

Qualified education expenses do not include room and board, travel, research, clerical help, or equipment and other expenses that are not required for enrollment in, or attendance, at the institution. This is true even if the fee is required. Any amount received as scholarship, or fellowship, used to pay these costs is considered taxable. This is the same case even for athletes who get scholarships.

When the beneficiary of a scholarship is liable for taxation, it is the individual’s responsibility to inform tax authorities about taxable amounts of the scholarship. If one is not sure about tax status, it advisable to consult with the college administration so that confirmation is obtained. For most scholarships, an individual has always to be at the top of his or her grades scores if funds are to continue being released. Often times, financial support is withdrawn from students who fail to abide by the terms and conditions of the sponsorship program.

Special rules apply for American residents, and citizens, who have received scholarships or fellowships to study abroad. It is important to engage the services of a tax expert in order to find out about tax obligations.

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