Are Scholarships Unearned Income for Tax Purposes?

Yes, scholarships are unearned income for tax purposes, but only the taxable portion counts. Money you spend on tuition and required course materials at an eligible school stays tax-free; anything left over, such as scholarship dollars applied to room and board, is unearned income to the student.¹² That classification matters most for students still claimed as dependents, because unearned income above $2,700 in 2026 can be taxed at a parent’s rate under the kiddie tax.³

Why the IRS Treats Scholarships as Unearned

Earned income is money paid for performing a service: wages, tips, self-employment. A scholarship is a transfer of funds, not a payment for work, so even a competitive merit award falls on the unearned side of the line.¹

There is one meaningful exception. If your award requires you to work as a teaching assistant, research assistant, or in another service role as a condition of receiving the money, the portion tied to that work is wages. It usually shows up on a W-2 and counts as earned income. Certain federal programs, including the National Health Service Corps Scholarship and specified Armed Forces health professions scholarships, are exempt from this service-for-pay rule and remain treated under the scholarship rules.¹

Which Part of a Scholarship Is Taxable

A scholarship is tax-free only when you are a degree candidate at an eligible institution and you spend the money on qualified education expenses. Qualified expenses are narrow:²

Tuition and fees required for enrollment.
Books, supplies, and equipment, but only when the school requires them of every student in the course.

Everything else is taxable unearned income. Room and board, travel, optional equipment, and personal expenses all fall outside the exclusion.² If you receive a $20,000 award and $12,000 covers tuition while $8,000 covers a dorm, the $8,000 is taxable to you.

Mandatory student health insurance catches many people off guard. Even when the school requires the plan and bills it with tuition, the IRS does not treat insurance or medical fees as qualified education expenses, so scholarship money that pays for it is taxable.⁴

What Unearned Classification Means: the Kiddie Tax

The practical reason to care about the unearned label is the kiddie tax. It was designed to keep families from shifting investment income to a child in a lower bracket, and the 2025 Instructions for Form 8615 specifically list “taxable scholarship and fellowship grants not reported on Form W-2” as unearned income for this purpose.⁵

For 2026, the first $2,700 of a dependent’s unearned income is handled gently. The dependent’s limited standard deduction offsets the first $1,350, the next $1,350 is taxed at the child’s own rate, and only the amount above $2,700 is taxed at the parent’s marginal rate if that rate is higher.³

Who Actually Gets Caught by It

The kiddie tax applies only when all of the following are true for the year:⁵

The child had more than $2,700 in unearned income.
The child is required to file a return.
The child was under 18 at year-end, or was 18 and did not earn more than half of their own support, or was a full-time student age 19 through 23 and did not earn more than half of their own support.
At least one parent was alive at year-end.
The child does not file a joint return.

The support test is the escape hatch for many college students. A full-time student between 19 and 23 who earns enough from a job to cover more than half of their own living expenses is outside the kiddie tax, even with substantial taxable scholarship money. One quirk worth knowing: scholarships themselves do not count as “support” when running the support test for a full-time student.⁵

Parents sometimes ask whether they can pull the student’s scholarship income onto their own return with Form 8814. They cannot. That election is limited to a child whose gross income is only interest and dividends (including capital gain distributions) and totals less than $13,500. Scholarship income is neither, so the student has to file their own return, with Form 8615 attached if the kiddie tax applies.³

Reporting the Taxable Portion

Where the taxable amount goes on the return depends on whether the school issued a W-2. If a portion of your award was pay for services and appears in Box 1 of a W-2, include it with your wages on Line 1a of Form 1040.²

For the more common case where nothing was withheld and no W-2 was issued, report the taxable scholarship amount on Schedule 1 (Form 1040), line 8r. That line is labeled specifically for scholarship and fellowship grants and flows through to Line 8 of Form 1040.⁶

Your school’s Form 1098-T shows tuition payments in Box 1 and scholarships administered in Box 5, but it does not calculate what is taxable.⁷ You do that yourself by subtracting your qualified expenses from the total scholarship, and you should keep receipts for tuition, required books, and course fees to back up the number.

When Making More of the Scholarship Taxable Pays Off

Because a scholarship’s tax-free status hinges on how the money is spent, and the IRS lets you decide the allocation, there are situations where you deliberately treat more of the award as taxable. The reason is the American Opportunity Tax Credit, which is worth up to $2,500 per eligible student per year, with up to $1,000 refundable.⁸ The AOTC only applies to qualified expenses you did not pay with tax-free scholarship money.⁹

Take a student with $10,000 in tuition and a $10,000 scholarship. Applying the whole scholarship to tuition keeps it tax-free but leaves no qualified expenses for the credit. Reallocating $4,000 of the scholarship to living expenses makes that $4,000 taxable while freeing up $4,000 in tuition, and the maximum AOTC on $4,000 of expenses is $2,500. A student in the 10% or 12% bracket pays roughly $400 to $480 in extra tax to claim the $2,500 credit.¹⁰

Two limits matter before trying this. The full AOTC requires a modified adjusted gross income of $80,000 or less ($160,000 for joint filers), phasing out completely above $90,000 ($180,000 joint).⁸ Room and board never qualify for the AOTC, no matter how you slice the scholarship. And the extra taxable income you create can push a dependent’s unearned income across the $2,700 kiddie tax threshold, so run both calculations together before making the choice.

A Note on SSI

If the student receives Supplemental Security Income, a separate set of rules applies. The Social Security Administration also treats scholarships as unearned income but excludes amounts used for tuition, fees, or other necessary educational expenses, including vocational and technical training costs. Funds set aside for upcoming educational expenses are also excluded as a countable resource for nine months after receipt; after that, unspent money starts counting toward SSI resource limits. Scholarship dollars spent on food, clothing, or shelter count as unearned income in the month received and reduce that month’s SSI payment.¹¹

1
Office of the Law Revision Counsel. 26 USC 117 – Qualified Scholarships
2
Internal Revenue Service. Publication 970 (2025), Tax Benefits for Education
3
Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
4
Internal Revenue Service. Qualified Education Expenses
5
Internal Revenue Service. 2025 Instructions for Form 8615 – Tax for Certain Children Who Have Unearned Income
6
Internal Revenue Service. Schedule 1 (Form 1040) 2025
7
Internal Revenue Service. Form 1098-T Tuition Statement (2025)
8
Internal Revenue Service. American Opportunity Tax Credit
9
Internal Revenue Service. Education Credits: Questions and Answers
10
Internal Revenue Service. The Interaction of Scholarships and Tax Credits
11
Social Security Administration. POMS SI 00830.455 – Grants, Scholarships, Fellowships, and Gifts