Depending on the kind of financial aid, and how it is used, your financial aid may have to be reported as income.
Financial aid is treated differently based on whether it is “gift aid” (basically, merit- or need-based aid) – typically most “grants” and “scholarships” fall in to this category – or “compensation based aid” (aid granted in exchange for work) – some “followships” and nearly all “work study” arrangements are this type. Gift aid is tax exempt. Compensation aid (like all wages and other compensation) is taxable as income.
The IRS doesn’t make any distinction about the source of the funds – whether federal, state, local, or from a nonprofit of for-profit organization.
Gift aid is not taxable as long as:
- You spend the funds on tuition and related, required educational expenses (books, supplies, mandatory student fees) and not on things like room and board (in which case, it becomes taxable)
- The funds did not exceed the actual educational costs (if they did, it becomes taxable)
- You are pursuing a degree at an accredited institution (whether undergraduate or graduate)
Luckily, you’re not alone in figuring out what’s taxable. In most cases, your financial aid provider should have sent you a Form W-2 or Form 1099-MISC if your aid was taxable.
Learn more about taxes and financial aid: http://www.irs.gov/taxtopics/tc421.html
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