Taxable Scholarships, Fellowships & Grants
By Michael Aston, E.A.
Alhambra Tax Center
Most people believe that scholarships, fellowships, and grants are tax-free. And in most cases the amount received is tax-free. But it’s not uncommon for all or a portion of the amount to be recorded as taxable income. So…let’s look over the difference between a taxable and non-taxable scholarship, fellowship, and grant.
TAX FREE SCHOLARSHIP, FELLOWSHIP & GRANTS are tax free if both the following exist:
· The taxpayer is a degree candidate at an eligible education institution. An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regular enrolled body of students in attendance at a place where it carries on its educational activities.
· The Taxpayer uses the funds to pay qualified education expenses. Qualified education expenses.
o Tuition and fees required to enroll or attend an eligible educational institution.
o Fees, books, supplies and equipment required of all students in students’ course of instruction.
TAXABLE SCHOLARSHIPS, FELLOWSHIPS & GRANTS are taxed if either of the following apply.
· The funds were received for teaching, research or other services required as a condition of receiving the scholarship, fellowship or grants.
· Incidental expenses such as room and board, travel and optional equipment.
When someone hands me a 1098T that shows the scholarship amount received is higher than the tuition costs -- my first question is to ask where the extra money went?
Most of the time the answer will be room and board. And if that’s the case -- the difference would be taxable on the student’s tax return. If the client tells me the money went to pay for books and school fees – the difference is nontaxable.
If you or your dependent is receiving a full ride scholarship which includes room and board -- make sure somebody keeps track of all the required expenses (books, supplies and fees), to minimize the possible tax liability.
Information from this article came from the IRS and “The Tax Book”. If you have any questions please go to irs.gov or contact your tax preparer.