Navigating the Complex Tax Maze for Student-Athletes

The world of college athletics has undergone significant changes in recent years, particularly with the introduction of Name, Image, and Likeness (NIL) income opportunities for student-athletes. As these athletes balance academics and sports, they must also navigate the complexities of taxation related to their various sources of income. This article explores the tax implications of NIL income, scholarships, grants, financial aid, part-time jobs, education credits, education loan interest and more.

Scholarships

Scholarships can be either taxable or non-taxable depending on how they are used and the terms of the scholarship. Here are the general rules:

Non-Taxable Scholarships: Scholarships are generally non-taxable if they are used for qualified education expenses. These expenses typically include tuition, fees, and required books, supplies, and equipment for courses at an eligible educational institution. The scholarship must not exceed the amount of these expenses.
Taxable Scholarships: If any part of the scholarship is used for non-qualified expenses, such as room and board, travel, or optional equipment, that portion is considered taxable income. Additionally, if the scholarship terms specify that it must be used for non-qualified expenses, it is taxable.
Athletic Scholarships: These are often a mix of qualified and non-qualified funds. Student-athletes must carefully track how their scholarships are used to determine the taxable portion.

Reporting Requirements: Whether you need to report a scholarship on your tax return depends on whether any part of it is taxable. If the scholarship is entirely non-taxable, it generally does not need to be reported. However, if any portion is taxable, it must be included in your gross income.

Education Tax Credits: When calculating education tax credits, qualified tuition must be reduced by any tax-free scholarship amounts. However, if the scholarship terms allow, students can allocate funds to maximize tax benefits by choosing how to apply the scholarship to different expenses.

Understanding these rules can help in planning how to use scholarship funds effectively to minimize tax liability and maximize education tax credits.

Grants and Financial Aid

Pell Grants and other federal student aid are generally not taxable if they are used for qualified education expenses. Qualified education expenses typically include tuition and fees, books, supplies, and equipment required for courses as well as transportation and living expenses (such as room and board at the educational institution or off-campus rent).,

However, if a student chooses to apply the Pell Grant to non-qualified expenses, the amount used for those expenses must be included in gross income, which could make it taxable.

Pell Grants generally do not have to be repaid.

Income from NIL (Name, Image, and Likeness)

NIL is the acronym for name, image, and likeness. In 2020, the NCAA changed its rules to allow schools to pay athletes for academic performance, but this was overruled by the Supreme Court in the NCAA vs. Alston case, which removed limits on such payments. In July 2021, the NCAA adopted a policy allowing student-athletes to profit from their NIL, marking a significant shift in college sports.

Now student-athletes can earn NIL income through endorsements, sponsorships, social media promotions, autograph signings, and appearances. These earnings are typically treated as self-employment income.

Tax Reporting for NIL Income: Athletes receiving NIL income are generally considered independent contractors. They should receive Forms 1099-NEC or 1099-K, depending on the payment method. Athletes must report this income on their tax returns and may need to make estimated tax payments quarterly. The income is generally reported as self-employment income on a 1040 Schedule C.

Deductions and Expenses: Student-athletes can deduct ordinary and necessary business expenses related to their NIL income, such as travel, marketing, and professional fees related to the NIL income.
Self-Employment Tax: Since NIL payments are generally considered self-employment income, student athletes must pay self-employment (SE) taxes if their net earnings exceed $400 in a tax year. SE tax is like the FICA (6.2%) and Medicare (1.45%) withholding for employees. The key difference is that while employers pay an amount equal to what their employees pay, self-employed individuals act as both employer and employee, thus paying both portions, resulting in a total SE tax rate of 15.3%. Unlike employees, who are taxed on their gross taxable wages, self-employed individuals are only subject to SE tax on their net profit, which is calculated as gross income minus business expenses deductions.
Cryptocurrency: Occasionally a student athlete will receive NIL payments in cryptocurrency. When this occurs, there are several tax implications to consider:
o    Income Recognition: Cryptocurrency received as payment for services, including NIL activities, is considered taxable income. The fair market value of the cryptocurrency at the time of receipt must be reported as income. Thus, a student-athlete receiving NIL payments in cryptocurrency would include that compensation, converted into U.S. dollars, on their Schedule C as part of their gross income.
o    Capital Gains Tax: If the athlete holds the cryptocurrency and later sells or exchanges it for a different cryptocurrency or fiat currency, any gain or loss from the transaction will be subject to capital gains tax. The gain or loss is calculated based on the difference between the sale price and the fair market value at the time the cryptocurrency was received.
o    Record Keeping: It is crucial for the athlete to maintain detailed records of all cryptocurrency transactions, including the date of receipt, fair market value at the time of receipt, and any subsequent sales or exchanges.

Overall, receiving NIL payments in cryptocurrency adds significant complexity to tax reporting and compliance.

NCAA Eligibility and Tax Considerations

Maintaining NCAA eligibility is crucial for student-athletes, and understanding the tax implications of their income is part of this process:

Impact on Financial Aid: NIL income and other earnings can affect a student-athlete's eligibility for need-based financial aid. It's important to report all income accurately on the Free Application for Federal Student Aid (FAFSA).
Compliance with NCAA Rules: While the NCAA now allows NIL income, athletes must still comply with institutional and conference rules. This includes understanding how income affects their amateur status and eligibility.

Part-Time Jobs

Many student-athletes take on part-time jobs to supplement their income. The income earned from these jobs is subject to federal and state income taxes. Key considerations include:

W-2 Income: Employers provide a W-2 form detailing wages earned and taxes withheld. Student-athletes must report this income on their tax returns.
Self-Employment: If a student-athlete engages in freelance work or gigs, they may be considered self-employed. This requires filing a Schedule C and paying self-employment taxes on net earnings over $400. If the student also has NIL income, the two are combined for SE tax purposes and the $400 limit applies to the combined total.

Student’s Standard Deduction

The standard deduction for a dependent, such as a full-time student-athlete under the age of 24, is calculated based on their earned income. This includes salaries, wages, tips, and other compensation for work performed, as well as any taxable portion of scholarships or fellowship grants.

Dependent: A student who does not provide over half of their own support is claimed as a dependent by their parents. The standard deduction for such a dependent is the greater of $1,350 or their earned income plus $450, but it cannot exceed the regular standard deduction for a single filer, which is adjusted annually for inflation. If the student's unearned income (such as interest and dividends) is more than $1,350 but less than $13,500, their parents have the option to claim this unearned income on their tax return.
Non-Dependent: A non-dependent is a self-supporting student who pays more than half of their own support and does not qualify as a dependent. This student is eligible for the regular standard deduction, which is adjusted annually for inflation, and is $15,000 for 2025 if the student is not married or $30,000 if married a filing a joint return with their spouse.

Education Credit

The American Opportunity Tax Credit (AOTC) is a tax credit available to help offset the costs of higher education by reducing the amount of income tax the taxpayer may have to pay. For 2025, a credit of up to $2,500 for adjusted qualified education expenses paid for each student who qualifies for the credit may be claimed.

The credit is partially refundable: if the credit reduces the tax to zero, 40% of any remaining amount of the credit (up to $1,000) is refundable.

To claim the AOTC, the student must be pursuing a degree or other recognized education credential, be enrolled at least half-time for at least one academic period beginning in the tax year and not have completed the first four years of higher education at the beginning of the tax year. Additionally, the credit can be claimed for a maximum of four tax years per eligible student.

The person who claims the student as a dependent on their tax return is generally the one who can claim the AOTC for that student. Most often this will be the parent(s) of the student. However, if the student is not claimed as a dependent, they can claim the credit on their own tax return.

There is another type of higher education credit called the Lifetime Learning Credit (LLC). Since students in their first four years of college will virtually all qualify for the larger AOTC, this article does not discuss the LLC.

When calculating education tax credits, qualified tuition must be reduced by any tax-free scholarship amounts. However, if the scholarship terms allow, students can allocate funds to maximize tax benefits by choosing how to apply the scholarship to different expenses.

Student Loan Interest Deduction

The student loan interest deduction allows borrowers to deduct up to $2,500 of interest paid on qualified student loans from their taxable income each year. This deduction is considered an above-the-line deduction, meaning it can be claimed regardless of whether the taxpayer itemizes deductions or takes the standard deduction.

Qualified Student Loans: The loan must be used solely for qualified higher-education expenses, which include tuition, fees, room and board, books, equipment, and other necessary expenses related to attending an eligible educational institution.
Eligible loans can include federal student loans, private loans, home equity lines of credit, personal loans from unrelated parties, and even credit cards, provided they are used exclusively for education expenses.
Loans from relatives or pension plans do not qualify.
Eligibility for Deduction: The borrower must be legally responsible for the loan and must have used the loan for qualified education expenses.
The deduction is phased out for higher-income taxpayers. For single filers, the phase-out range for 2025 is an Adjusted Gross Income (AGI) of $85,000 to $100,000. For married couples filing jointly, the range is $170,000 to $200,000.
The deduction is not available for those who file as married filing separately or for an individual who is claimed 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 an eligible educational institution.
The loan must be used within a reasonable time frame, typically defined as within 180 days of the start of the academic period for which the expenses are incurred.

State Tax Considerations

State tax laws can vary significantly, impacting student-athletes differently depending on where they attend school and where they earn income:

State Income Taxes: Some states have no income tax, while others have high rates. Athletes must file state tax returns in states where they earn income, which may include their home state and the state where their college is located, depending on the filing threshold set by each state.
NIL-Specific Legislation: Several states have enacted NIL-specific legislation, which may include tax provisions. Athletes should be aware of these laws and how they affect their tax obligations.

Planning and Compliance

Effective tax planning and compliance are essential for student-athletes to avoid penalties and maximize their financial benefits:

Record Keeping: Maintaining detailed records of all income, expenses, and scholarships is crucial for accurate tax reporting.
Professional Advice: Consulting with a tax professional who understands the unique circumstances of student-athletes can help navigate complex tax issues.
Education and Resources: Universities and athletic departments can provide resources and education to help athletes understand their tax responsibilities.

The financial landscape for student-athletes is evolving rapidly, with NIL income opportunities adding new dimensions to their tax obligations.

Understanding how the various tax implications of education benefits impact students and parents can lead to more beneficial use of the various tax benefits. Contact this office for assistance.