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Great news! My daughter earned a partial athletic scholarship for college. However, I wasn’t sure if this scholarship is taxable as income. Would I be responsible for that tax bill since she’s obviously claimed as my dependent?


Congrats to your daughter. The news may be even better than you think. As long as the recipient is in a degree program, which I imagine is the case for your daughter, the IRS says there is no tax due on money awarded in a scholarship, athletic or otherwise, if it’s used for tuition and other expenses directly related to coursework, such as books, lab fees and equipment.
Here’s where it gets tricky: If the scholarship states that a certain amount is being given for tuition and the rest for room and board, then only the tuition part is tax free. If, on the other hand, it doesn’t say explicitly how the money is to be spent, then as long as the award is less than her tuition and other qualified expenses, you’re off the hook. The financial aid people do this for a living and know the rules in and out, so the scholarship probably will be worded in a way that works to your advantage and minimizes your tax liability.
In the unlikely event that the scholarship will not be entirely nontaxable and you claim your daughter as a dependent, then yes, any bill would be yours to pay. Chances are you would still owe little or nothing, however. If your daughter doesn’t work, then up to $5,700 of otherwise taxable scholarship money would escape liability because of the quirky way the standard deduction is calculated for scholarship recipients. As the award goes up, in certain cases, the standard deduction goes up, too. If she can figure out why, then she should be able to qualify for an accounting scholarship if soccer doesn’t work out.
-Conrad de Aenlle