Tax time came as usual this spring. I am aware of the federal income tax and the basics of how the tax structure operates — you make “x” amount of money, you pay “a” amount to the government; you make “y” amount of money, you pay “b,” and so on.
As a student I was unaware, however, of how to factor scholarships in to taxes. I file my taxes independently, as I am sure many students with complicated family situations do. I’ve held multiple part-time jobs during the past year and was aware of the approximate amount I would be required to pay. To save money on tax preparation, I asked my boyfriend’s dad to help me file mine this year. He uses tax preparation software Turbo Tax to file on behalf of his family for years.
After inputting all of my personal and W-2 information, we began to go through the series of questions to determine how much I owed the refunds for which I qualified — investments during the past year, whether I am a new home or car owner, family size and other questions of the like.
When we came to the part on scholarships and educational expenses, we looked to my 1098-T form from the Howdy financial aid portal. I typed in the amount of aid I received, subtracted the total amount paid to the University in tuition, and then reported the balance of that amount as “income.”
The reported amount was high — I have a full-ride in scholarships and received additional aid this past year with my summer study abroad. I am thankful for the scholarships, which pay my educational expenses, but wasn’t so thankful when I realized that I owe taxes on more than $10,000 of “income.”
After subtracting the costs of textbooks and a summer school class I took at Blinn, I was still paying almost $1,000 in taxes just on my scholarships, in addition to taxes on my income from my part-time jobs. I was shocked. I didn’t know where that money would come from — the only possibility was sacrificing the money I needed for rent during the summer.
I enlisted the help of my grandparents’ accountant to double-check things and make sure I hadn’t overlooked any education expenses. After digging through paperwork, he found a few expenses I had yet to report that lowered the amount I owed.
I was lucky to have family and friends who helped navigate the tax season, but I still learned much from the experience. Students with scholarships should be prepared to pay taxes on any funds not deemed “educational expenses.” If your scholarship — like mine — pays for room and board, that money is taxable. Educational expenses include costs of tuition, books, computers and equipment, but not room and board. Though your scholarship donor already paid taxes on this money when they earned it, it is taxed a second time when you receive it — kind of like an inheritance tax or a tax on gambling winnings.
Do not be caught off guard or unprepared. Whatever scholarship you have, budget to save some of this amount during the year so that you’re ready when tax season rolls around. I was caught with insufficient savings due to insufficient planning and lack of awareness. Don’t make the same mistake.