Article Highlights:
- Scholarships
- Grants and Financial Aid
- Income from NIL (Name, Image, and Likeness)
- NCAA Eligibility and Tax Considerations
- Part-Time Jobs
- Student’s Standard Deduction
- Education Credit
- Student Loan Interest Deduction
- State Tax Considerations
- Planning and Compliance
The landscape of collegiate sports has changed dramatically in recent years, notably with the advent of Name, Image, and Likeness (NIL) revenue potential for student-athletes. While balancing academics and athletics, these athletes must also manage the complexity of taxes based on their multiple sources of income. This page delves into the tax consequences of non-taxable income, scholarships, grants, financial assistance, part-time employment, education credits, student loan interest, and other topics.
Scholarships
Scholarships may be taxed or not, depending on how they are utilized and the conditions of the scholarship. Here are some general rules:
Non-Taxable Scholarships
Scholarships are normally not taxed if utilized for approved educational costs. Tuition, fees, and mandatory books, materials, and equipment for courses at an approved educational institution are common examples of such costs. The scholarship cannot exceed the sum of these expenditures.
Taxable Scholarships
If any portion of the scholarship is spent on non-qualified expenditures such as lodging and board, travel, or optional equipment, that amount is considered taxable income. Furthermore, if the scholarship rules require that it be utilized for non-qualified purposes, it is taxed.
Athletic Scholarships
These are often a combination of qualified and non-qualified money. To calculate the taxable component, student-athletes must keep detailed records of how their scholarships are spent.
Reporting Requirements
The extent to which a scholarship is taxable determines whether it must be reported on your tax return. If the scholarship is fully non-taxable, it usually does not need to be recorded. However, if any percentage is taxed, it must be included in your total income.
Education Tax Credits
When computing education tax credits, eligible tuition must be subtracted from any tax-free scholarship amounts. However, if the scholarship rules allow, students may manage monies to optimize tax advantages by deciding how to apply the scholarship to various costs.
Understanding these guidelines will help you determine how to best utilize scholarship cash to reduce tax obligation and maximize education tax credits.
Grants and Financial Aid
Pell Grants and other federal student assistance are usually tax-free if utilized for approved educational costs. Tuition and fees, books, materials, and equipment necessary for courses, as well as transportation and living costs, are examples of qualified education expenditures.,
However, if a student decides to utilize the Pell Grant for non-qualified costs, the amount must be included in gross income, which may be taxed.
Pell Grants are often not required to be returned.
Income from NIL (Name, Image, and Likeness)
NIL stands for name, image, and likeness. The NCAA revised its regulations in 2020 to enable colleges to compensate athletes for academic success, but the Supreme Court rejected this in the NCAA vs. Alston decision, which eliminated such payment limitations. In July 2021, the NCAA implemented a regulation that allows student-athletes to benefit from their NIL, signaling a big change in collegiate athletics.
Student-athletes may now make no money via endorsements, sponsorships, social media marketing, autograph signings, or appearances. These earnings are often categorized as self-employment income.
Tax Reporting for NIL Income
Athletes who make no money are often called independent contractors. They should get Forms 1099-NEC or 1099-K, depending on the payment mechanism. Athletes must record this revenue on their tax forms and may be required to pay anticipated taxes quarterly. The income is often recorded as self-employment income on a 1040 Schedule C.
Deductions and Expenses
Student-athletes are allowed to deduct reasonable and necessary business expenditures linked to their NIL revenue, such as travel, marketing, and professional fees.
Self-Employment Tax
NIL payments are typically considered self-employment income, therefore student athletes must pay self-employment (SE) taxes if their net earnings reach $400 in a given tax year. SE tax is similar to the FICA (6.2%) and Medicare (1.45%) withholdings for workers. The major distinction is that, whereas companies pay an amount equal to what their workers pay, self-employed persons operate as both employer and employee, paying both percentages, for a total SE tax rate of 15.3%. Unlike workers, who are taxed on their gross taxable pay, self-employed persons are only taxed on their net profit, which is computed by deducting company expenditures from gross revenue.
Cryptocurrency
Sometimes a student athlete may get NIL payments in bitcoin. When this happens, there are numerous tax consequences to consider:
Income Recognition
Cryptocurrency obtained in exchange for services, including NIL activities, is considered taxable income. The fair market value of the cryptocurrency at the time of receipt must be declared as income. As a result, a student-athlete receiving NIL payments in cryptocurrency would report that remuneration, converted to US dollars, on Schedule C as part of their gross income.
Capital Gains Tax
If the athlete retains the cryptocurrency and then sells or trades it for another cryptocurrency or fiat cash, any profit or loss from the transaction will be liable to capital gains tax. The gain or loss is determined as the difference between the selling price and the fair market value when the bitcoin was received.
Record Keeping
It is critical for the athlete to keep full records of all cryptocurrency transactions, including the date received, fair market value at the time of receipt, and any later sales or swaps.
Receiving NIL payments in cryptocurrencies increases the complexity of tax reporting and compliance.
NCAA Eligibility and Tax Considerations
Student-athletes must maintain NCAA eligibility, which includes comprehending the tax consequences of their revenue.
Impact on Financial Aid
NIL income and other earnings may have an impact on a student-athlete's ability to receive need-based financial assistance. It is critical to declare all income properly on the Free Application for Federal Student Aid (FAFSA).
Compliance with NCAA Rules
While the NCAA now permits NIL money, players must still follow institutional and conference guidelines. This includes knowing how money influences their amateur status and eligibility.
Part-Time Jobs
Many student-athletes work part-time jobs to boost their income. The earnings from these employment are subject to federal and state income taxes. Key factors include:
W-2 Income
Employers issue a W-2 form that shows pay received and taxes withheld. Student athletes must record this money on their tax returns.
Self-Employment
If a student-athlete takes on freelance work or jobs, they may be termed self-employed. This necessitates completing a Schedule C and paying self-employment taxes on net earnings exceeding $400. If the student has no income, the two are combined for SE tax purposes, and the $400 limit is applied to the combined sum.
Student’s Standard Deduction
The standard deduction for a dependant, such as a full-time student-athlete under the age of 24, is determined by their earned income. This includes salaries, wages, gratuities, and other forms of payment for work done, as well as any taxable component of scholarship or fellowship payments.
Dependent
A student who does not contribute more than half of their own support is designated as a dependant by their parents. The standard deduction for such a dependant is the greater of $1,350 or their earned income plus $450, although it cannot exceed the single filer's usual standard deduction, which is increased for inflation each year. If the student's unearned income (such as interest and dividends) exceeds $1,350 but less than $13,500, their parents may claim it on their tax return.
Non-Dependent
A non-dependent is a self-supporting student who pays more than half of their own expenses and is not classified as a dependant. This student is qualified for the ordinary standard deduction, which is increased for inflation each year and is $15,000 in 2025 if the student is not married and $30,000 if married and submitting a joint return with their spouse.
Education Credit
The American Opportunity Tax Credit (AOTC) is a tax credit that may assist cover the expenses of higher education by lowering the amount of income tax that the taxpayer must pay. For 2025, each eligible student may receive a credit of up to $2,500 for adjusted approved school expenditures paid.
The credit is partly refundable: if it lowers the tax to zero, 40% of the credit (up to $1,000) remains refundable.
To be eligible for the AOTC, a student must be seeking a degree or other recognized education credential, enrolled at least half-time for at least one academic period starting in the tax year, and have not completed the first four years of higher education at the start of the tax year. In addition, each qualifying student may claim the credit for up to four tax years.
The individual who lists the student as a dependant on their tax return is usually the one who may claim the AOTC for that student. Typically, this will be the student's parent(s). If the student is not listed as a dependant, they may claim the credit on their own tax return.
Another sort of higher education credit is the Lifetime Learning Credit (LLC). Because students in their first four years of college will almost always qualify for the bigger AOTC, this article will not cover the LLC.
When computing education tax credits, eligible tuition must be subtracted from any tax-free scholarship amounts. However, if the scholarship rules allow, students may manage monies to optimize tax advantages by deciding how to apply the scholarship to various costs.
Student Loan Interest Deduction
Borrowers may deduct up to $2,500 in interest paid on eligible student loans from their taxable income each year. This deduction is classified as an above-the-line deduction, which means it may be claimed regardless of whether the taxpayer itemizes or takes the standard deduction.
Qualified Student Loans
The loan may only be used for qualifying higher-education expenditures, such as tuition, fees, housing and board, books, equipment, and other costs associated with attending an approved educational institution. Federal student loans, private loans, home equity lines of credit, personal loans from unrelated parties, and credit cards are all eligible, as long as they are utilized only for educational purposes. Loans from family and pension plans do not qualify.
Eligibility for Deduction
The borrower must be legally accountable for the loan and have utilized it for qualifying educational purposes. The deduction is being phased away for higher-income people. The phase-out range for single filers in 2025 is $85,000 to $100,000 in adjusted gross income (AGI). For married couples filing jointly, the range is between $170,000 and $200,000. The deduction is not available to married taxpayers filing separately, nor to individuals listed as dependents on another taxpayer's return.
Additional Requirements
The student must be enrolled at least half-time in a degree or certificate program at a qualifying educational institution.
The loan must be utilized within a reasonable time limit, which is normally 180 days from the commencement of the academic session in which the expenditures are spent.
State Tax Considerations
State tax regulations might vary greatly, affecting student-athletes differently depending on where they attend school and generate revenue.
State Income Taxes
Some states have no income tax, while others have high rates. Athletes must file state tax returns in places where they receive money, which may include their home state and the state where they attend college, depending on each state's filing threshold.
NIL-Specific Legislation
Several states have passed NIL-specific laws, which may include tax measures. Athletes should understand these laws and how they effect their tax responsibilities.
Planning and Compliance
To minimize fines and maximize financial rewards, student-athletes must engage in effective tax preparation and compliance.
Record Keeping
Keeping thorough records of all income, spending, and scholarships is critical for effective tax filing.
Professional Advice
Consulting with a tax specialist who knows student-athletes' specific circumstances may assist them negotiate difficult tax concerns.
Education and Resources
Universities and sports departments may provide tools and information to assist players understand their tax obligations.
The financial environment for student-athletes is fast changing, with NIL revenue potential adding additional layers to their tax requirements.
Understanding how the varied tax consequences of education benefits affect students and parents may lead to more efficient utilization of the tax advantages. Please contact this office for help.
