Taxes on Scholarships

My daughter received a full scholarship to college, including tuition and room and board. Will any of the money be taxable? --K.M., Kokomo, Ind.

The 529 Plan Scholarship Exception

Unfortunately, yes. Scholarships are tax-free up to the cost of tuition and course-related expenses, such as books and supplies. Money for anything else not required for enrollment, including housing and travel, is taxed as income. And any scholarship money received as payment for services, such as teaching or assisting in a lab, may be taxed.

Luckily, scholarships are generally taxed at the student’s income tax rate and not the parents’, so taxes will usually be much lower.

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.