Do I Have to Pay Taxes on Scholarships and Fellowships?

Scholarship and fellowship grant money is partially tax-free and partially taxable, depending on how you use it. The portion of a scholarship or fellowship used to pay for tuition, required fees, and required course materials (books and supplies) at a qualified educational institution is excluded from income and not taxable. However, amounts used for room and board, travel, optional equipment, or other living expenses are taxable as ordinary income, even if those funds came from a scholarship. If you receive more in scholarship money than the cost of tuition and required fees, the excess is generally taxable. Scholarships that require you to provide services — like teaching or research — in return for the funding are taxable as compensation, not as an educational scholarship, regardless of how they're labeled. Athletic scholarships and need-based grants follow the same rules: the tuition portion is tax-free, but amounts covering room and board are taxable. If you also qualify for the American Opportunity Tax Credit, you'll need to carefully coordinate which expenses are covered by scholarships versus out-of-pocket payments to maximize your tax benefit.