You probably don't have much in common with college athletes when it comes to athletic ability. However, when it comes to income taxes, Uncle Sam levels the playing field: Scholarships for athletes are taxed the same as rides for academic types because they aren't considered payment for services.
For any of the scholarship to be tax-free, the athlete has to be a degree candidate. To the Internal Revenue Service, that means several criteria are met. The athlete must be pursuing a degree (though they don't have to finish). The school has to be legally authorized to offer classes that can be used toward a college degree or learning a trade. Yes, that even includes the one-and-done basketball star who isn't sticking around after his freshman year.
Scholarships for tuition and fees required to attend the school qualify as tax-free treatment for athletes. Athletes can also exclude money for school-related books and supplies. However, these only count if it applies to every student in the class. For example, if everyone has to buy a copy of a certain textbook, and the athlete uses scholarship money to buy it, it's tax-free. However, if the athlete goes out and buys some extra study guides with that money, that portion of the scholarship is taxable.
In short, if the scholarship isn't used for tax-free expenses, it's taxable. Common taxable expenses include room and board, personal travel and other living costs. Say an athlete gets a scholarship that covers tuition, room and board. Even if the student lives on campus and has a meal plan, and never gets a paper check, his room and board portion is still taxable income.
If the scholarship has to be spent on a particular expense, the tax treatment for the athlete is determined by that designation. For example, say an athlete gets a scholarship to cover half of tuition and half of room and board. Only the tuition portion is tax-free. If the scholarship doesn't designate a specific expense, it's taxed or not taxed based on what the athlete does with the money. If the athlete uses all of a $15,000 scholarship for tuition, it's all tax-free. However, if she used 5,000 for room and board, all $5,000 is taxable.
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