These days, many students are facing a dilemma as they enter or leave school: how to handle their scholarships and grants.
In the best case scenario, your college will forward all of your scholarship money directly to you as it is earned. In this case, you're free to spend as you see fit, but saving for college can be difficult as you don't have full control over your money.
On the other hand, if you receive a scholarship and aren't required to pay it back, your university may choose to pass the money on directly to them instead of giving it to you. You can still enjoy some benefits from this arrangement: tuition and fees usually get reduced (meaning you save money when you register), and your grades are usually reported to the scholarship donor, increasing your chances of being awarded another scholarship in future.
If you receive a grant, it can be even more confusing. Grants are often need-based, which means the school may not tell you how much money is available to you until registration time rolls around. If the money is there, you'll have it to spend. But if your fellow students out-donate each other, you might find that the college has exhausted all of the available funds before they get to you. This means that your registration fees or room & board will have to be paid using loans instead.
As I said above, the best case scenario is if the scholarship or grant is given directly to you. However, depending on your situation, it might be better for you to have the scholarship or grant go directly to your parents or school instead. This will eliminate some of the stress, and possibly save you money in the long run.
What Your Scholarships and Grants Mean for Your Taxes?
If your parents claim you as a dependent on their taxes, they may be able to claim the tuition and fees deduction . This allows them to reduce their taxable income by up to $4,000 depending on their tax bracket. If they earn too much, the credit can be transferred to you (up to $2,000). However, when they claim this deduction, your scholarships and grants are counted as income for that year.
What about other deductions? No problem! The same money is never counted twice when it comes to deductions. So you can still claim any deductions or credits you qualify for (such as charitable contribution, student loan interest , etc).
What about scholarships and grants that aren't taxable?
Well, this is certainly the best possible scenario. The only downside is that it's not allowed by all schools . It's important to remember that even though your college may not require you to pay your scholarships and grants back, that doesn't mean they're free money. The school has to do a lot of work to get it for you, and someone is paying for it all. As such, most schools have policies in place to confiscate over-awarded funds from previous years from the current year's students if need be.
Tax credits available for those paying for school:
American Opportunity Tax Credit is one of the most common tax credits, and it's usually used by parents or guardians. The AOTC allows you to claim up to $2,500 for qualified tuition and fees per year ( taxable income limits apply). It can be claimed in addition to other education-related deductions/credits (such as the Tuition & Fees Deduction and Lifetime Learning Credit ), so you may benefit from this even if it's not taxable.
Hope Scholarship Tax Credit: This credit is only available to the first two years of your education (not including graduate studies). It can be used once per year, and reduces adjusted gross income by up to $1,000 depending on your tax bracket . It's also transferable, so both you and your parents can claim it in the same year if they have taxable income.
Life Time Tax Credit : This credit is available for your first 60 months of post-secondary education (not including graduate studies). It reduces adjusted gross income by up to $2,000 depending on your tax bracket . It's also transferable, so both you and your parents can claim it in the same year if they have taxable income.
There are plenty of unique scholarship opportunities out there. But regardless of which kind you get, always remember that your education is worth fighting for.
The information is provided as general education, and should not be considered professional tax advice. You should consult your financial advisor to determine what may be best for your situation.