Earning a college degree often comes with a number of financial considerations. One burning question that you might be thinking to yourself is, 'Do I have to pay taxes on my financial aid?'
With the 2020 tax season in full swing, let's explore some of the key concepts you need to know as a college student when it comes to financial aid and filing taxes.
1. There are enrollment requirements to keep in mind.
First off, if you are working on a college degree and receiving financial aid but are not enrolled in a degree program being offered by an eligible school, you must pay taxes on the entire amount of financial aid that you receive. It's important to note that this does exclude student loans, which are always exempt from taxes.
In addition, students can be enrolled either on a part-time or full-time basis to take advantage of tax-exempt payments one receives through financial aid.
2. Qualifying expenses are generally tax-exempt.
There are several types of financial aid that are considered tax-exempt. This means that a student does not incur any taxes on any of the income he or she earns through financial aid payments. However, this money must be spent on qualifying expenses, which may refer to various course-related expenses like:
- Student activity fees
- Study guides
- School supplies (pens, pencils, folders, binders, etc.)
- Other required equipment/materials for a course
Expenses like room and board, travel, and certain expenditures incurred to attend an actual campus are generally not considered qualifying expenses. Therefore, you must pay taxes on them when using financial aid funds to cover them.
3. Several forms of financial aid are exempt from taxes.
Scholarships, grants, student loans, and work-study positions are some of the most common types of financial aid available to help students ease their college expenses.
Scholarships and grants are considered tax-exempt if the money from them is spent to cover qualifying expenses for one's education. However, a student would owe taxes on the portion of a scholarship or grant that is used to pay for non-qualifying expenses. It is important to note, though, that certain scholarships are specifically designed to cover non-qualifying expenses. In this case, the entire amount of the scholarship would be taxable income.
In terms of work-study jobs, the income earned from such positions is treated as wages by the IRS. This means it is considered taxable income. Keep in mind that income earned from work-study programs is not subject to FICA taxes. The main caveat is that this work must take place on campus or you are taking a minimum of six credit hours of coursework per semester as a student.
With regard to student loans, funding received through them is not considered taxable income by the IRS. The only exception to this rule is if you are granted loan forgiveness in the future. In that case, you may owe income tax on the portion of the loan that is forgiven.
4. You must make the IRS aware of any taxable financial aid income.
Aside from work-study jobs, the IRS does not receive any formal indication of your financial aid money through a 1099 or W-2.
This is why you must report the taxable portions of any grants or scholarships you receive. This information should be reported on Form 1040 and should be included with your adjusted gross income (AGI).
5. Don't forget about tax breaks for college students.
While these aren't exactly considered a form of financial aid, you should still be aware of some IRS tax breaks for college students.
The IRS offers two tax credits – the Lifetime Learning Credit and the American Opportunity Tax Credit. Each of these credits can help reduce your ultimate tax bill or even give you a tax refund in some cases. Learn more about these tax credits for college students on this IRS page.
Plus, the student loan interest deduction can help those who use student loans. It can be applied once their loan repayment terms officially begin. Learn more on this IRS resource page.
The good news with these tax breaks is that even if you don't receive any form of financial aid or a very minimal amount, these tax-saving opportunities can help you save at least some money in the end if you qualify for them.