Tax on Scholarships?

image of tax paperwork

It’s never too early to start thinking about taxes.

Last month, we highlighted the recipients of the WSCPA Scholarship, one of the top scholarships Accounting students can receive.  Since this is the Master of Science in Taxation blog, we take pleasure in asking the all-important question—is that scholarship included in taxable income?

Foster Accounting Lecturer, Christina Nichols, helped us out with the answer, which in most cases is no–scholarships and grants are typically excluded from gross income if they are used to pay for qualified tuition items.  In some cases, however, students receive more scholarship money than their qualified education expenses allow.  Student volunteers at the UW VITA program this past winter had the difficult job of explaining this to scholarship recipients who ended up with an unexpected tax bill.

Senior Lecturer, Christina Nichols

Lecturer, Christina Nichols

The amount in excess of the qualified education expenses is included in gross income, which is, of course, taxable. Often this means students will need to pay tax due at filing time if they did not have sufficient tax withholding or make any estimated tax payments.  If students are aware of this situation beforehand, they can make estimated payments throughout the year to avoid having to make an unexpected tax payment with the filing of their tax return.

How do you know if your scholarship amount exceeds your qualified education expenses?

Here’s a helpful worksheet from the IRS for figuring out if qualified education expenses are greater than scholarship income. (It’s for 2018. Check back for the 2019 rules but they are expected to remain the same). For more information, here is a related news article and additional info from the IRS.

How do you estimate your payments?

The IRS provides helpful resources to taxpayers trying to determine the appropriate amount of their estimated estimated tax payments.

Nichols suggests,

“A good rule of thumb is to make sure you pay either 100% of your prior year’s tax or 90% of your current year’s tax (whichever is smaller).  If you don’t pay enough during the year, then on top of paying the additional tax you might also have penalties. Check around October/November to make sure you’ve withheld enough, especially with the withholding tables being updated. That way there is still time to adjust withholding on a W-2 before the end of the year.”

Tax laws are an ever-changing puzzle full of loopholes, tricks and traps.  Most of us run and hide when tax time comes around but graduates of the MST program become valuable specialists bringing peace of mind to both individual and corporate tax filers alike.

Find out more about the MST degree.