Are Scholarships Tax-Free?

Scholarships are generally tax-free if certain IRS and other requirements are met. Here's what you need to know about when scholarships are taxable.

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Scholarships can be helpful for students and families looking for ways to pay for college. And now that Decision Day is coming soon, many students plan to attend their favorite colleges and universities and probably say yes to a scholarship or two. Meanwhile, a common belief is that scholarships are “free money” (i.e., are not taxable). But that isn’t always the case — scholarship money can sometimes be taxable. Here’s what you need to know.

When scholarships are tax-free: Qualified education expenses

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Tax CreditAmountEligibility
American Opportunity Tax Credit (AOTC)Maximum credit of $1,500 per undergraduate student for four years of education.The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student. The full AOTC tax credit is available for people with a modified adjusted gross income of $80,000 or less or $160,000 or less if you’re married and filing jointly. The credit amount is phased out when your income as a single filer falls between $80,000 and $90,000 and between $160,000 and $180,000 for joint filers.
Lifetime Learning Credit:A maximum of $2,000 per tax return that can apply to any level of student (i.e., undergraduate, graduate, professional education, etc.). Unlike the AOTC, the lifetime learning credit isn’t limited to four years of education.The income limits and phase-outs are the same as for the American Opportunity Tax Credit.

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Kelley R. Taylor
Senior Tax Editor, Kiplinger.com

As the senior tax editor at Kiplinger.com, Kelley R. Taylor simplifies federal and state tax information, news, and developments to help empower readers. Kelley has over two decades of experience advising on and covering education, law, finance, and tax as a corporate attorney and business journalist.