Table of Contents
- Scholarships and Fellowships
- Other Types of Educational Assistance
Individual retirement arrangements (IRAs). You can set up and make contributions to an IRA if you receive taxable compensation. Under this rule, a taxable scholarship or fellowship is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. For more information about IRAs, see Publication 590.
This chapter discusses the income tax treatment of various types of educational assistance you may receive if you are studying, teaching, or researching in the United States. The educational assistance can be for a primary or secondary school, a college or university, or a vocational school. Included are discussions of:
Need-based education grants, such as a Pell Grant, and
Qualified tuition reductions.
Many types of educational assistance are tax free if they meet the requirements discussed here.
Special rules apply to U.S. citizens and resident aliens who have received scholarships or fellowships for studying, teaching, or researching abroad. For information about these rules, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
A scholarship is generally an amount paid or allowed to, or for the benefit of, a student (whether an undergraduate or a graduate) at an educational institution to aid in the pursuit of his or her studies.
A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.
The value of contributed services and accommodations. This includes such services and accommodations as room (lodging), board (meals), laundry service, and similar services or accommodations that are received by an individual as a part of a scholarship or fellowship.
The amount of tuition, matriculation, and other fees that are paid or remitted to the student to aid the student in pursuing study or research.
Any amount received in the nature of a family allowance as a part of a scholarship or fellowship.
A scholarship or fellowship is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution.
A scholarship or fellowship is tax free only to the extent:
It does not exceed your expenses;
It is not designated or earmarked for other purposes (such as room and board), and does not require (by its terms) that it cannot be used for qualified education expenses; and
It does not represent payment for teaching, research, or other services required as a condition for receiving the scholarship. (But for exceptions, see Payment for services,
Use Worksheet 1–1 to figure the amount of a scholarship or fellowship you can exclude from gross income.
Attend a primary or secondary school or are pursuing a degree at a college or university, or
Attend an educational institution that:
Provides a program that is acceptable for full credit toward a bachelor's or higher degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and
Is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency.
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.
Room and board,
Clerical help, or
Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.
You received a scholarship of $2,500. The scholarship was not received under either of the exceptions mentioned above. As a condition for receiving the scholarship, you must serve as a part-time teaching assistant. Of the $2,500 scholarship, $1,000 represents payment for teaching. The provider of your scholarship gives you a Form W-2 showing $1,000 as income. Your qualified education expenses were at least $1,500. Assuming that all other conditions are met, $1,500 of your scholarship is tax free. The $1,000 you received for teaching is taxable.
You are a candidate for a degree at a medical school. You receive a scholarship (not under either of the exceptions mentioned above) for your medical education and training. The terms of your scholarship require you to perform future services. A substantial penalty applies if you do not comply. The entire amount of your grant is taxable as payment for services in the year it is received.
|1.||Enter the total amount of any scholarship or fellowship for 2012. See Amount of Scholarship or Fellowship, earlier.||1.|
|2.||Enter the amount from line 1 that was for teaching, research, or any other services required as a condition for receiving the scholarship. (Do not include amounts received for these items under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.)||2.|
|3.||Subtract line 2 from line 1||3.|
|4.||Enter the amount from line 3 that your scholarship or fellowship required you to use for other than qualified education expenses||4.|
|5.||Subtract line 4 from line 3||5.|
|6.||Enter the amount of your qualified education expenses||6.|
|7.||Enter the smaller of line 5 or line 6. This amount is the most you can exclude from your gross income (the tax-free part of the scholarship or fellowship)||7.|
|8.||Subtract line 7 from line 5||8.|
|9.||Taxable part. Add lines 2, 4, and 8. See Reporting Scholarships and Fellowships , later, for how to report this amount on your tax return||9.|
If and to the extent your scholarship or fellowship does not meet the requirements described earlier, it is taxable and must be included in gross income. You can use Worksheet 1–1, Taxable Scholarship and Fellowship Income, later, to figure the tax-free and taxable parts of your scholarship or fellowship.
Whether you must report your scholarship or fellowship depends on whether you must file a return and whether any part of your scholarship or fellowship is taxable.
If your only income is a completely tax-free scholarship or fellowship, you do not have to file a tax return and no reporting is necessary. If all or part of your scholarship or fellowship is taxable and you are required to file a tax return, report the taxable amount as explained below. You must report the taxable amount whether or not you received a Form W-2. If you receive an incorrect Form W-2, ask the payer for a corrected one.
For information on whether you must file a return, see Publication 501, Exemptions, Standard Deduction, and Filing Information, or your income tax form instructions.
How you report any taxable scholarship or fellowship income depends on which return you file.
The following discussions deal with other common types of educational assistance.
A Fulbright grant is generally treated as a scholarship or fellowship in figuring how much of the grant is tax free.
These need-based grants are treated as scholarships for purposes of determining their tax treatment. They are tax free to the extent used for qualified education expenses during the period for which a grant is awarded.
An appointment to a United States military academy is not a scholarship or fellowship. Payment you receive as a cadet or midshipman at an armed services academy is pay for personal services and will be reported to you in box 1 of Form W-2. Include this pay in your income in the year you receive it unless one of the exceptions, discussed earlier under Payment for services , applies.
Payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free. Do not include these payments as income on your federal tax return.
If you qualify for one or more of the education benefits discussed in chapters 2 through 12, you may have to reduce the amount of education expenses qualifying for a specific benefit by part or all of your VA payments. This applies only to the part of your VA payments that is required to be used for education expenses.
You may want to visit the Veteran's Administration website at www.gibill.va.gov for specific information about the various VA benefits for education.
You have returned to college and are receiving two education benefits under the latest GI Bill: (1) a $1,534 monthly basic housing allowance (BHA) that is directly deposited to your checking account, and (2) $3,840 paid directly to your college for tuition. Neither of these benefits is taxable and you do not report them on your tax return. You also want to claim an American opportunity credit on your return. You paid $5,000 in qualified education expenses (see chapter 2, American Opportunity Credit , later). To figure the amount of credit, you must first subtract the $3,840 from your qualified education expenses because this payment under the GI Bill was required to be used for education expenses. You do not subtract any amount of the BHA because it was paid to you and its use was not restricted.
If you are allowed to study tuition free or for a reduced rate of tuition, you may not have to pay tax on this benefit. This is called a “tuition reduction.” You do not have to include a qualified tuition reduction in your income.
A tuition reduction is qualified only if you receive it from, and use it at, an eligible educational institution. You do not have to use the tuition reduction at the eligible educational institution from which you received it. In other words, if you work for an eligible educational institution and the institution arranges for you to take courses at another eligible educational institution without paying any tuition, you may not have to include the value of the free courses in your income.
The rules for determining if a tuition reduction is qualified, and therefore tax free, are different if the education provided is below the graduate level or is graduate education.
You must include in your income any tuition reduction you receive that is payment for your services.
If you receive a tuition reduction for education below the graduate level (including primary, secondary, or high school), it is a qualified tuition reduction, and therefore tax free, only if your relationship to the educational institution providing the benefit is described below.
You are an employee of the eligible educational institution.
You were an employee of the eligible educational institution, but you retired or left on disability.
You are a widow or widower of an individual who died while an employee of the eligible educational institution or who retired or left on disability.
You are the dependent child or spouse of an individual described in (1) through (3), above.
A tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following requirements are met.
It is provided by an eligible educational institution.
You are a graduate student who performs teaching or research activities for the educational institution.
You must include in income any other tuition reductions for graduate education that you receive.
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