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Are Scholarships Taxable? Here’s Everything You Need to Know

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.


The cost of higher education can be astronomical for many students, and while there are many ways to pay for college, scholarships and grants are two of the best ways to make it more affordable. If you are awarded a scholarship, whether it’s merit-based or need-based, congratulations! However, the next thing to consider after receiving a grant is your tax liability on the money — not as much fun but nonetheless important.

Some scholarships and fellowships are tax-free, but some are subject to income taxes. We’ll walk you through the ins and outs of scholarship taxation and how to pay taxes on grants that are taxable.

When scholarships are not taxable

There are fellowship or scholarship grants that are tax-free, according to the IRS, and you don’t need to report them as a source of income, when you meet both of the conditions below:

  • You are studying toward a degree at a higher education institution.
  • All the funds you receive are used for qualified education expenses: You either use the money to pay tuition and fees required for enrollment or attendance at the college or university, or cover course-related expenses, such as textbooks, supplies and equipment.

For example, if you receive a $10,000 scholarship and pay it toward the $20,000 tuition, then you won’t owe taxes on the money. However, if your scholarship is $30,000 and you use $20,000 for tuition and cover your rent with $10,000, that $10,000 is taxable income.

Some other types of grants, such as Fulbright grants and need-based grants like a Pell Grant, are also treated as scholarship funds for purposes of determining their tax treatment: They are tax-free if grantees use them to cover qualified education expenses during the time when a grant is awarded.

April Walker, lead manager for Tax Practice and Ethics at the American Institute of CPAs, told MagnifyMoney that it doesn’t matter if a scholarship is granted by your school or sent to you directly from an organization — you follow the same rules above to determine whether it’s taxable or not.

Take a few minutes to complete this IRS questionnaire to determine whether your scholarship money is taxable: Do I Include My Scholarship, Fellowship, or Education Grant as Income on My Tax Return?

When scholarships are taxable

However, grants should be included in your gross income if they are non-qualifying education expenses, meaning they don’t meet the conditions we just talked about.

Using scholarships for incidental expenses

The IRS explains that scholarship or fellowship funds that are used to cover incidental expenses are taxable. Incidental expenses are the money you spend for non-academic activities that are not required as part of your education, such as rent, insurance, transportation and living expenses.

Compensation for services

If students receive a scholarship or fellowship grant that requires them to be a teacher assistant, research assistant or perform other services, the funds are also taxable as salaries. There are exceptions, though. The IRS said grant recipients of the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship and Financial Assistance Program do not have to include the scholarship funds they receive for service in their gross income.

Similarly, a grant or fellowship awarded to a non-degree-seeking individual to finance a certain research project, a report or a product is taxable, according to tax specialists interviewed by MagnifyMoney. But you could deduct expenses related to the work, such as travel and supplies for research, from your taxable income.

How to pay taxes on scholarships

Students should expect to receive a Form 1098-T that states their tuition and scholarship amounts from their schools by Jan. 31. If your tax-free scholarship or fellowship grant is your only income, you don’t have to file a tax return or report it, however, if part or all of the grant is taxable, then you are required to file a tax return, according to the IRS.

If you file Form 1040, Form 1040A, or Form 1040EZ, include the taxable amount in the total amount reported on the “Wages, salaries, tips” line of your tax return.

If the taxable amount wasn’t reported on Form W-2, enter “SCH” along with the taxable portion in the space to the left of the “Wages, salaries, tips” line. Form W-2 is the form an employer sends to an employee and to the IRS at the end of each year that reports an employee’s annual income and the amount of taxes withheld from their paychecks. Most likely, graduate students who perform teaching or research services at their institutions will receive a W-2.

If you file Form 1040NR or Form 1040NR-EZ, report the taxable amount on the “Scholarship and fellowship grants” line.

Even if you don’t get tax forms, you must pay taxes on your scholarship income that’s subject to income taxes.

In general, the taxable amount of scholarships would be included in the adjusted gross income on the federal return, said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. But depending on your state of residence and other incomes you have, you may also have to pay state income tax on your scholarship income, Luscombe said. Some states don’t have an income tax. Many states with an income tax use federal Adjusted Gross Income as the starting point in determining their state taxes, Luscombe said, and if your gross income is higher than your state’s income tax base, you will pay state income tax on your scholarship.

How can I minimize my tax burden from scholarships or fellowships?

Tax tips for students

Tax specialists advised if you’re a student, whether you are a dependent on your parent’s tax return or an independent student, you should keep track of the scholarships you receive and your qualified education expenses to make sure you spend as much of your scholarship as possible on qualified education expenses. Keep an eye out for a 1098-T, and in the case of graduate teaching assistants or research assistants, watch out for a Form W-2 at the end of the year.

If your scholarship doesn’t cover all your tuition and fees, Walker suggested you still keep track of your expenses, as some may qualify for education credits, which we will talk about below.

Tax tips for working professionals

For non-degree-seeking individuals who received a grant for an independent research project, Luscombe said they may want to treat the grant as a business income.

If you are running a business on your own, you’re most likely seen as a sole proprietorship owner for tax purposes. You will have to report business-related income and losses on a Schedule C (Form 1040) each year. Luscombe said grant awardees may claim the fellowship activity as a business activity on Schedule C to deduct the related expenses from their taxable income.

Under the new tax law, pass-through business owners can deduct up to 20% of their qualified business income from a partnership, S corporation or sole proprietorship. Individuals earning $157,500 or less ($315,000 for married couples) are eligible for the fullest deduction.

Luscombe advised those who received a one-off grant during the year keep separate records of all the income and expenses related to it.

Education tax credits

If part or all of your — or your child’s or spouse’s — scholarships are taxable, one of the ways for you to offset education expenses is to claim education tax credits, which reduce the amount of your income tax. There are two types of credits available: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

  • American Opportunity Tax Credit: This credit allows a taxpayer an annual maximum credit of $2,500 per undergraduate student of the costs for school or course-related expenses. Luscombe said AOTC is probably the most generous of tax breaks available for undergraduate education. To qualify for the full credit, your income must be $80,000 or less ($160,000 or less for married filing jointly). The credit is phased out for those whose incomes are above the thresholds.
  • The Lifetime Learning Credit: It allows a taxpayer a credit of up to $2,000 per year per tax return. This credit applies to an eligible student’s costs for undergraduate, graduate or professional degree courses. There’s no limit on the number of years you can claim the credit. You must earn $66,000 or less ($132,000 or less for married filing jointly) to qualify for this credit. The credit is phased out for those whose incomes are above the thresholds.
This interactive worksheet from the IRS can help you answer the following question: Am I Eligible to Claim an Education Credit?

To be eligible for either credit, students should receive a Form 1098-T. You also need to complete the Form 8863 and attach it to your tax Form 1040 or its variations. You cannot claim the credit if you are a dependent on someone’s tax return.

You cannot double dip if you qualify for both credits — you must compare options and choose one or the other. You cannot claim either credit if someone else claims you as a dependent on their tax return.

Tax deductions

If you don’t qualify for either credit, you can look into potential tax deductions to reduce your taxable income. There are two deductions that may be applicable: the Tuition and Fees Deduction and the Student Loan Interest Deduction. You can claim these deductions even if you do not itemize your deductions.

The tuition and fees deduction allows you to deduct qualified higher education expenses of up to $4,000 from taxable income per tax return for yourself, your spouse or your child. You need to claim your qualified deduction on Form 8917. You cannot claim this deduction if your filing status is married filing separately or if someone else claims you as a dependent on their tax return. The income threshold for this deduction is the same as that for the AOTC. (Note: This tax break was supposed to expire at the end of 2016, but the Bipartisan Budget Act of 2018 renewed it for tax year 2017. It’s unclear whether it will be continued for tax year 2018.)

Student loan interest deduction: If your income is less than $80,000 ($165,000 if filing a joint return) and you took out a student loan to pay for qualified education expenses for you, your spouse or your dependent, you may reduce your taxable income by up to $2,500 of student loan interest you paid. You cannot claim this deduction if your filing status is married filing separately or if someone else claims you as a dependent. You should receive Form 1098-E, the Student Loan Interest Statement, which can help you figure out your student loan interest deduction.

This interactive worksheet can also help: Can I Claim a Deduction for Student Loan Interest?

You cannot claim the Tuition and Fees Deduction (if it’s available for tax year 2018) if you have claimed an education credit for the same expense, Luscombe said, but you can still claim the Student Loan Interest Deduction.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at [email protected]

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Where Most People DIY Their Taxes and Tips for Last Minute Returns

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

A new MagnifyMoney analysis found that 45% of Americans file their taxes without paid help, while the other 55% rely on a paid tax preparer. The analysis is based on IRS statements of income data for returns filed Jan. 1, 2012 – Dec. 31, 2016.

Taking the DIY approach to taxes is most popular in these metro areas: Austin, Texas (62%); Virginia Beach, Va. (61%), Seattle, Wash. (59%), San Antonio, Texas (58%), Richmond, Va. (58%), and Portland, Ore. (56%).

For those taking their taxes into their own hands, using tax preparer software is a perfectly fine alternative. The IRS expects 155 million tax returns to be filed this year and 70% of tax filers are expected to receive refunds. However, missing even one simple detail on your return could make a big difference in your refund.

At the very least, to avoid errors, the IRS recommends e-filing for DIY preparers. It takes out some of the risk for human error, especially since most e-filing programs can help spot mistakes. If you’re comfortable preparing your own taxes, there are some last-minute tax tips to follow as you near the April 17 deadline.

DIY vs. PRO: Which is best for you?

The DIY approach is smart for people with simple personal taxes, where you basically can copy and paste information into the return, said Eric Nisall, founder of, which provides accounting and bookkeeping for freelancers. For example, if simply have a W-2 from your employer and you don’t itemize deductions or have investments, you could definitely do it yourself.

Online programs continue to offer new features to help customers comprehend their taxes as they go, such as prompts nudging them to fill out missing information, or explaining why certain information is needed

A DIY approach also works if you keep organized throughout the year with receipts and statements, and if you are comfortable going through those details to correctly enter your taxes.

On the flip side, you should probably consider hiring a paid preparer if you are concerned about the difficulty of filing a tax return, have complicated financial information or want to develop a long-term accounting strategy.

Where to find help

There isn’t just one catch-all category for tax preparers today. Preparers include enrolled agents, attorneys and CPAs.

If you’re simply looking for someone to crunch the numbers for you and make sure your taxes are submitted accurately and on time, a basic tax preparer or an IRS-enrolled agent is a perfectly fine solution. They will usually charge a flat rate for filing your taxes (it will vary by location).

If you are looking for a more well-rounded tax preparer who can also offer long-term guidance on your tax strategy, you should seek out a certified public accountant.

“A good CPA won’t just fill in the forms,” said Steve Osiason, a certified public accountant and member of the Florida Institute of CPAs. “A good CPA will give you advice going forward about what you should be doing to save money.”

If you do decide to hire a professional, make sure it’s a reputable preparer who is transparent about their pricing, Nisall said.

He said some tax preparers will charge on such arbitrary basis as per-form completed (some of which take just a few check boxes to complete), or based on what you made in the previous year.

Ask for a list of their qualifications, proof of licensing and if they keep up with changes by taking continuing education classes. At the very least, ask for referrals from trusted friends, family or work colleagues. Some firms may even have Yelp review pages where you can see how past customers have rated their service.

The IRS also has a helpful tool you can use here: Directory of Federal Tax Return Preparers.

Don’t rush

Rushing through a meticulous task like filing taxes can mean a smaller return or no return at all.

“That’s where people make the biggest mistakes,” said Nisall.

If you do feel like you’re crunched for time and may not finish by the deadline, Nisall recommends filing for an extension early. He warns not to confuse the automatic extension to file (Form 4868) with an extension to pay; you are still required to pay an estimate by the deadline.

However, if you still don’t have enough time to pay, there’s more good news.

“If you owe money, you can also ask the IRS for an installment agreement when you file your taxes,” said Lisa Greene-Lewis, a CPA with TurboTax. “The installment agreement will allow you to pay your tax debt over six years.”


Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kat Khoury
Kat Khoury |

Kat Khoury is a writer at MagnifyMoney. You can email Kat here

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Should You Pay Your Taxes With a Rewards Credit Card?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any credit card issuer. This site may be compensated through a credit card issuer partnership.


While most people don’t have a choice as to whether they’ll pay taxes or not, you can certainly choose how you want to pay your tax bill. Using a regular checking account is not only the most traditional and easiest route but it is also, most importantly, free. You can also use other methods, too, such as a debit card, wire transfer and even cash. And, yes, you can even pay taxes with a credit card.

Using the latter option — a credit card – to pay your taxes might sound potentially lucrative. In a new analysis of IRS data by MagnifyMoney, we found taxpayers who owe money to the IRS will face an average federal tax bill of $5,294. If you’ve got a great cashback credit card, that’s a lot of potential points you could rack up.

Before you swipe, consider the risks of paying your taxes with plastic, such as additional fees and the dangers of swapping one debt for another.

Ultimately, paying a tax bill with a credit card may not be a winning proposition — that is, unless you stand to gain something from it.

When paying with a rewards credit card makes sense

If you pay with a credit card, you’ll face fees ranging from 1.87% to 3.93% depending on how you file and how you pay. That means your challenge is simple — if you want to justify paying your tax bill with credit, you’re simply going to have to find a way to earn a greater net benefit than the amount you’re spending on fees.

Here are a few cases where that can happen:

With a no-fee 2% rewards card

Citi® Double Cash Card – 18 month BT offer

Read Full Review

The information related to Citi® Double Cash Card – 18 month BT offer has been independently collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication.

Citi® Double Cash Card – 18 month BT offer

Intro BT APR
0% for 18 months on Balance Transfers
Regular Purchase APR
15.49% - 25.49% (Variable)
Annual fee
Rewards Rate
Earn 2% cash back on purchases: 1% when you buy plus 1% as you pay.
Credit required
Excellent, Good

Typical credit card rewards are usually 1%, but there are exceptions. Citi® Double Cash Card – 18 month BT offer effectively offers a 2% cashback rate without an annual fee. You earn cash back twice  — 1% on purchases and 1% as you pay for those purchases in full or over time.

Fidelity® Rewards Visa Signature® Card

Fidelity® Rewards Visa Signature® Card

Regular Purchase APR
15.74% Variable
Annual fee
Rewards Rate
Unlimited 2% cash back on everyday purchases.

Another example of an unlimited 2% cashback card is the Fidelity® Rewards Visa Signature® Card. You have to have a “an eligible” Fidelity account in order to get your cash back, but it’s an easy condition to meet. Fidelity says eligible accounts include most non-retirement accounts (like IRAs), which means you could open a Fidelity® Cash Management account, for example, which is their version of a checking account. There’s no minimum deposit requirement to open an account. When you earn rewards from the card, you can then deposit your cashback earnings into that linked checking account.There are other 2% cashback cards, but unlike the two cards above, most of them are annual-fee cards. An annual fee, plus the fees you’d incur by using the card to pay your taxes could totally negate any potential rewards you might gain.

2.5% or higher rewards card

There are better options that 2% rewards cards, although they are time-limited and more restrictive one way or another.

Discover it® Miles


on Discover Bank’s secure website

Rates & Fees

Discover it® Miles

Regular APR
13.49% - 24.49% Variable
Annual fee
Rewards Rate
Unlimited 1.5x Miles for every dollar spent on all purchases - with no annual fee
The Discover it® Miles card offers 1.5x Miles, and it has another big perk going for it. Discover will match all the miles you’ve earned at the end of your first year, so long as you’re a new card member. That effectively makes it a 3% cashback card for the first year. And there is a $0 annual fee.

And don’t worry about the word “miles.” Discover miles are not real airline miles which can only be redeemed for travel. You can redeem your miles as a credit to your account for travel purchases or transfer them into a linked bank account. Each mile is the cash equivalent of one cent.

The downside to this plan is that the Discover it® offer is only good for new card members in their first year. After that, you’ll earn just 1.5x Miles per dollar spent.

Alliant Cashback Visa® Signature Card

Alliant Cashback Visa® Signature Card

Regular Purchase APR
12.24% - 15.24% Variable
Annual fee
$99 annual fee, waived the first year
Rewards Rate
Unlimited 3% cash back during the first year; 2.5% cash back afterwards

The Alliant Cashback Visa® Signature Card offers a whopping unlimited 3% cash back during the first year; 2.5% cash back afterwards. In addition, the $99 annual fee, waived the first year. Alliant Credit Union is easy to join, by donating $10 to Foster Care to Success.If you pay your taxes with a 3% cashback card, your profit will range from 1.01% to 1.13% for the first year of the card membership (based on the 1.87% to 1.99% convenience fee).

If you can nab a lucrative sign-up bonus

Credit card issuers often offer huge sign-up bonuses for a new card, but there is a catch – in order to qualify, you are supposed to meet a certain spending requirement that can be anything from $500 to $4,000 or more within a limited period of time.

The reason why issuers do that is to train you to use their card everywhere, so it becomes second nature after the threshold period is over. The problem for you, though, is that unless you’re a big spender, you might have a problem meeting the requirement and getting the bonus.

If that’s the case, you might want to pay taxes with the card even if it means losing a little cash on a convenience fee. Of course, that depends on the size of the bonus and the tax amount you’re charging to the card.

How paying taxes with a credit card works

You can pay taxes with a credit card on the internet, by phone or with a mobile device. You can also pay with a credit card when you e-file using a tax preparation program, such as TurboTax, H&R Block or others, although you will pay a higher fee for the “integrated e-file and e-pay debit/credit card option,” according to the IRS.

On the web or by phone

Visit the IRS page “Pay Your Taxes by Debit or Credit Card.” Select one of the processors and click the form or forms you need:


Debit Card

Credit Card

Digital Wallet


888-729-1040 Payment

888-658-5465 Service

International Non Toll-Free

1-501-748-8507 Live Operator

$2.59 flat fee

  • 1.87% fee

  • Minimum fee $2.59

See debit or credit card fees

(WorldPay US, Inc.)

844-729-8298 Payment

855-508-0159 Live Operator

844-825-8729 Service

International Non Toll-Free

1-615-550-1491 Payment

1-615-942-1141 Live Operator

1-615-550-1492 Service

$2.58 flat fee

  • 1.97% fee

  • Minimum fee $2.69

See debit or credit card fees


(Official Payments)

888-872-9829 Payment

877-754-4420 Live Operator

877-754-4413 Service

International Non Toll-Free

1-334-521-3842 Payment

  • $2.00 flat fee

  • ($3.95 flat fee for payments over $1,000)

  • 1.99% fee

  • Minimum fee $2.50

See debit or credit card fees


Please note that not all tax forms can be paid by a credit card, and there are other limitations as well.

E-file + E-pay integration

E-filing is more popular than ever, and for good reason. It’s very convenient and you can get your refund faster than someone who files on paper. The integrated e-file and e-pay debit/credit card option is available through some tax preparation software products, and tax professionals may offer the option as well.

You can use a credit card when e-filing, but with a higher convenience fee ranging from 2.35% to 3.99% (this fee integrates the e-filing and transaction fees). The IRS Pay by Debit or Credit Card page lists four integrated IRS e-file and e-pay service providers:

(Link2Gov Corporation)

1-888-658-5465 Service


Minimum convenience fee $3.95

(WorldPay US, Inc.)

1-888-877-0450 Live Operator


Minimum convenience fee $3.95

(Official Payments)

1-866-954-8426 Service


Minimum convenience fee $3.95

(File Your Taxes)

1-805-644-9398 Service


Minimum convenience fee $2.00


More about those fees

Federal laws don’t allow the IRS to pay any fees for credit or debit card processing, so they have authorized several service providers to process debit and credit card payments for them.

There is another reason why you might want to consider using your rewards credit card to pay your taxes: The convenience fees may be tax-deductible.

Per IRS:

  • Your card statement will list this payment as “United States Treasury Tax Payment.”
    The convenience fee paid to your provider will be listed as “Tax Payment Convenience Fee” or something similar.”
  • The fee is deductible for personal tax types as a miscellaneous itemized deduction. However, only those miscellaneous expenses that exceed 2% of the adjusted gross income can be deducted. For more information, refer to Publication 529, Miscellaneous Deductions.
  • For business tax types, the fee is a deductible business expense.

The above doesn’t mean that everyone can deduct. First you need to itemize, and there are other restrictions as well. Talk to your tax advisor to find out whether or not you can deduct the convenience fee in your particular situation.

Can’t afford your tax bill?

Check out this guide on what to do if you owe taxes to the IRS.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Andy Shuman
Andy Shuman |

Andy Shuman is a writer at MagnifyMoney. You can email Andy here