Posted by James Financial Services Inc

Scholarships, Fellowships and Grants & Their Tax Implications

Scholarships, Fellowships and Grants & Their Tax Implications

Higher education is expensive, with tuition and expenses rising every year.  Thankfully, there are assistance programs to relieve some of these costs in the form of scholarships, fellowships and grants.  If you are attending school and have received a scholarship, fellowship, or grant, you may have to follow specific guidelines when filing your taxes.  James Financial Services, Inc., can help you find out how these programs affect your taxes.

    Although there are not large differences in the way the three types are taxed, it is still important to understand the definitions behind a grant, scholarship and fellowship.  Grants, for instance, are defined as any money in exchange for purpose, such as education.  Scholarships are specific to undergraduate education, and provide partial or full assistance financially for qualifying expenses.  Fellowships are usually in reference to graduate programs or pre-undergrad programs outside the normal curriculum.  The major benefit of grants, scholarships, and fellowships is that they do not need to be repaid. 

    In rare cases, you do not need to be taxed on your scholarship.  If you are a full or part-time candidate for a degree for undergraduate or graduate education, you cannot be taxed on your scholarship if the scholarship covers tuition and fees, books and supplies for your courses, and/or required equipment.    However, your scholarship can be taxed if it is used to cover other expenses associated with your education, including room and board, travel, books and supplies not required for your courses, or research.  You can be partially taxed if you use a portion of your scholarship for tuition fees, and part for one of these expenses, such as room and board.  You would only be taxed on the portion that you used for room and board, not tuition.  Therefore, any scholarship, fellowship, or grant used entirely for qualifying educational expenses are considered to be tax-free.  

In order to meet the tax-free guidelines for fellowships, scholarships, and grants, you need to be considered a candidate for a degree in addition to spending the money on qualifying educational expenses.  To be qualified as a candidate, you must attend a primary or secondary school or be pursuing a degree at a college or university, or attend an institution that provides a full credit program toward a bachelor’s or higher degree, or a program for employment and is authorized to provide the program.   You also need to be attending an eligible educational institution, as determined by the IRS.  To determine whether your educational institution is considered eligible by the Internal Revenue Service, you must check to see if it maintains regular faculty.  The institution also must have a curriculum and regular student body in attendance.  

If you are to report your fellowship, grant or scholarship, you need to determine the amount received.  To determine the amount, you must consider the value of all services and accommodations covered on your behalf.  This includes any covered lodging, meals, laundry service, or additional accommodations.  You must report the income if you do not owe taxes, but have other income, like a job.  You must also report the scholarship, fellowship or grant if you used part of the program for non qualifying expenses.  If your only income for the year is one of these programs which is used strictly for qualifying education expenses, you are not considered to have taxable income and do not need to file a return.

    However, if you are receiving your scholarship, grant, or fellowship in place of compensation, you are required to pay tax on the entire portion of the program associated with this compensation.  Work-study or clerical help fellowships are included in this scenario, and are therefore taxable.  If you work to receive your fellowship, grant, or scholarship, this is the category you fall into.  

Tuition reduction programs, while offering a similar benefit, are considered to be different than a scholarship, fellowship or grant.  If you are allowed to attend a program tuition free, or for a reduced rate, you may not have to pay tax on this benefit.  Tuition reductions, as this circumstance is known, do not have to be included in your income, as long as they are received by and used at an eligible institution.

One thing that is unique about tuition reduction programs is that you don't have to use the tuition reduction at the eligible educational institution from which you received it.  For example, if you are employed by an eligible institution, and that institution pays for you to take courses at another eligible institution. Tuition reductions typically apply to higher paid employees, if benefits are available to employees, however, in order to offer tuition reduction benefits, the employer must make them available on the same basis to each employee of an equal position. 

    If you receive tuition reduction as payment for teaching, research, or services to the college, you must include this as part of your income.  However, if you are part of the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program, you do not need to pay taxes on the reduction.

    For undergraduate tuition reduction, or reduction of primary, secondary, or high school, it is tax free, if you are an employee of the institution, a former employee who retired or left on disability, spouse of a deceased, retired, or disabled former employee of the institution, or dependent of one of these.  You are also exempt from scholarship or reduction taxes if you are under 25 and both your parents are deceased.  

    For graduate tuition reduction, you will not have to pay taxes as long as it is provided by an eligible educational institution and you perform teaching or research for the institution.


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