Learn more about the fascinating realm of tax treatment and how it applies to the funds received as scholarships or fellowships.
A qualified scholarship or fellowship grant received by a candidate for a degree at an educational organization is generally excludable from gross income.
A scholarship or fellowship grant is generally a cash amount paid to, or for the benefit of, an individual to aid him or her in the pursuit of study or research. A scholarship or fellowship grant may also be made in the form of a reduction in the amount owed to an educational organization for tuition, room and board, or some other fee. A scholarship or fellowship grant may be funded by a college or university, governmental agency, charitable organization, business, or any other source. However, any amount provided by an individual to aid a relative, friend, or other individual in the pursuit of study or research is not considered a scholarship or fellowship grant if the grantor is motivated by family or philanthropic considerations.
A scholarship or fellowship grant is excluded from the recipient's gross income only to the extent it is used for qualified tuition and related expenses. Qualified tuition and related expenses are (1) tuition and fees required for enrollment or attendance at the educational organization; and (2) books, supplies, equipment, or other fees required for a course of instruction at the educational organization, provided that they are required of all students in the particular course of instruction. Incidental expenses incurred for things such as room and board, travel, research, clerical help, and other expenses that are not required for enrollment or attendance at the educational organization or for a course of instruction at the educational organization, are not qualified expenses. A scholarship amount you use to pay any expense that does not qualify is taxable, even if the expense is a fee that you must pay to the institution as a condition of enrollment or attendance.
Only a candidate for a degree at an educational organization can exclude a qualified scholarship or fellowship grant from gross income. For this purpose, a candidate for a degree includes (1) a primary or secondary school student, (2) an undergraduate or graduate student at a college or university who is pursuing studies or conducting research to meet the requirements for an academic or professional degree; and (3) a full-time or part-time student at an educational organization accredited by a nationally recognized accreditation agency that provides an educational program for full credit towards a bachelor's or higher degree, or that offers a program of training to prepare students for gainful employment in a recognized occupation. An educational organization is an organization that has as its primary function the presentation of formal instruction and that normally maintains a regular faculty and curriculum for a regularly enrolled body of students in attendance at the location where its educational activities are regularly carried on.
Generally, the exclusion for a qualified scholarship or fellowship grant does not apply to grants that represent payment received by the student for teaching, research, or other services. However, you do not have to include in income the part of any scholarship or fellowship that represents payment for teaching, research, or other services if (1) you receive the amount under the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, or amounts received in a comprehensive student work-learning-service program operated by a work college, and (2) you are a candidate for a degree at an eligible educational institution and use that part of the scholarship or fellowship to pay qualified education expenses.
If you have any questions on the exclusion for qualified scholarships and fellowships, please contact us at 901.316.0160.