Disclaimer

Tab D-3 Taxable Scholarship Income

Scholarships and Fellowships

A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate.

A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.

Table 1-1 provides an overview of the tax treatment of amounts received as a scholarship or fellowship (other than amounts received as payment for services). Generally, whether the amount is tax free or taxable depends on the expense paid with the amount and whether you are a degree candidate.

Table 1-1.Tax Treatment of Scholarship and Fellowship Payments1

Do not rely on this table alone. Refer to the text for complete details.
 AND you are...THEN your payment is...
IF you use the payment for...A degree
candidate
Not a
degree
candidate
Tax free2Taxable
TuitionX X 
  X X
FeesX X3 
  X X
BooksX X3 
  X X
SuppliesX X3 
  X X
EquipmentX X3 
  X X
RoomX  X
  X X
BoardX  X
  X X
TravelX  X
  X X
1 Does not include payments received for past, present, or future services.
2 Payments used for any expenses indicated in this column are tax free only if the 
terms of the scholarship or fellowship do not prohibit the expense.
3 If required of all students in the course.

Tax-Free Scholarships and Fellowships

A scholarship or fellowship is tax free only if:

  • You are a candidate for a degree at an eligible educational institution, and

  • You use the scholarship or fellowship to pay qualified education expenses.

Candidate for a degree.   You are a candidate for a degree if you:
  1. Attend a primary or secondary school or are pursuing a degree at a college or university, or

  2. Attend an accredited educational institution that is authorized to provide:

    1. A program that is acceptable for full credit toward a bachelor's or higher degree, or

    2. A program of training to prepare students for gainful employment in a recognized occupation.

Eligible educational institution.   An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.
Qualified education expenses.   For purposes of tax-free scholarships and fellowships, these are expenses for:
  • Tuition and fees required to enroll at or attend an eligible educational institution, and

  • Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses.
Expenses that do not qualify.   Qualified education expenses do not include the cost of:
  • Room and board,

  • Travel,

  • Research,

  • Clerical help, or

  • Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.

This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable.
The information at left comes from Pub 970 Tax Benefits for Education
The information in the table at left is also reproduced in Tab D, page 3 of your Pub 4012.

It is a surprise to many students, but some scholarship and grant income may be  taxable to the student.

The general rule:  all income is taxable unless specifically designated as taxfree.

If the scholarship or grant recipient is a degree candidate, then the taxable status of the scholarship or grant depends on what the money is used for.    

If a degree candidate uses the money for tuition, required fees, required books, required supplied, or required equipment, then the income is TAXFREE.

If a degree candidate uses the scholarship money for room, board, or travel, then the income is TAXABLE.

If the scholarship or grant recipient is not a degree candidate, then the income is TAXABLE, no matter what it is used for.

One more important point:  financial aid that comes in the form of a student loan is NOT taxable, regardless of what it is used for or the degree status of the borrower.  (Why not?  Because a loan is not income.)



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