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How To Avoid Tax Traps For Scholarship Winners

By Jason Markum

Paying for college is just about the hardest thing most of us will ever do. The cost of tuition just keeps climbing year and year out, usually faster than the normal rate of inflation! The best way to finance college is to get it paid for with a scholarship. Luckily scholarships are becoming more and more common, and more and more available for students; even students with less than stellar track records in the grades apartment.

But there is one or two major traps when it comes to winning a scholarship… these traps come from the Internal Revenue Service! Most people don’t realize that scholarships can be taxable. Now it’s true, the most scholarships are tax free, but they are only tax-free if they are used only for tuition, as well as books, course materials, supplies, and things like this that are directly related to your education needs.

If you use part of your scholarship to pay for your room and board, then that amount becomes taxable and you have fallen into the tax trap! Personal expenses also fall under the tax trap. Basically any item that you use your scholarship money to pay for that isn’t directly related to your college expenses becomes taxable.

It is incredibly important to keep records of all the things you spend your money on that came from scholarship money. Keep a list of tuition, university fees, books, and all the school supplies that you buy because it’s up to you to prove how much of the scholarship went to educated related purposes and how much of it went to other related purposes.

It may seem silly to have to keep records of a pizza that you ordered on a random Thursday; but if you use scholarship money to pay for it then you really do have to keep track precisely.

Another common trap that most people don’t even think about has to do with employment. If part of your scholarship or financial aid package depends on you working on campus, say in the library or in the cafeteria, then the IRS may consider part of your scholarship as taxable income and not a scholarship. So if you have a $20,000 scholarship, and $5000 of that scholarship comes from a work study program of some sort; then that $5000 may be taxable income.

Again, the rule of the day is to keep scrupulous records. Your financial aid package should spell out how much of your aid is derived from work study programs, and how much of it is derived from general grants and things of this nature. But be sure to keep track on your own as well. Keep any pay stubs that you may receive, and any other records that you can use to show exactly how much money you received from work study and how much you received from other sources.

Paying for College is one of the most difficult things most of us will ever do. Scholarships definitely help, just make sure you keep track of how you spend each scholarship dollar that you receive, and you should end up just fine. It’s a good idea to run your financial aid package passed your local accountant or CPA. Simply ask them if you owe any taxes and have them look through your financial aid package. It shouldn’t cost you very much to talk to a CPA for a few minutes, and the peace of mind will be well worth it.

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