When scholarships and grants are taxable

A scholarship or grant lands like unambiguous good news, and much of the time it's tax-free. But the tax code draws a line based on what the money PAYS FOR, not on the word 'scholarship.' Cross that line — spend award money on housing, meals, travel, or receive it as a stipend for services — and part of it becomes taxable income to the student. Knowing where the line sits prevents both a surprise bill and a missed planning opportunity.

The tax-free part vs. the taxable part

Scholarship and grant money is tax-free only to the extent it pays 'qualified education expenses' at an eligible school for a degree-seeking student: tuition, required fees, and required course materials like books and supplies. Money that pays for anything else — room and board, travel, optional equipment, or that arrives as a cash stipend — is taxable income to the student, reported on their own return.

Who reports it, and where

Taxable scholarship income belongs on the STUDENT'S return, not the parents' — even for a dependent. The good news for most students: they often have little other income, so the taxable portion frequently falls under the standard deduction and produces little or no actual tax. The Form 1098-T from the school reports tuition and scholarship totals, but it's a starting point, not gospel — reconcile it against what the money actually paid for.

The kiddie-tax wrinkle

Taxable scholarship income counts as EARNED income for the student's standard deduction (so a lot of it can be sheltered), but for the kiddie tax it's generally treated as unearned — meaning a large taxable scholarship can be taxed at the parents' rate above the threshold. For most students the amounts are small and this never bites, but for big taxable awards it's worth modeling before electing to make scholarship money taxable.

The bottom line

Scholarships are tax-free only for tuition, required fees, and required course materials; money for room, board, travel, or a services stipend is taxable to the student. Reconcile the 1098-T rather than trusting it, and remember the counterintuitive planning move — deliberately making some scholarship taxable can unlock a larger education credit for the family, often at little net cost. When the numbers are big or a stipend is involved, run it through tax software or a preparer, since the earned/unearned and kiddie-tax interactions get subtle fast.