Taxes on Scholarships, Fellowships and Grants

The portion of a scholarship used to pay for qualified tuition and related expenses may be excluded from taxable income, if the student is a degree candidate and the scholarship does not represent fee for services.

The full amount of a scholarship is exempt from FICA (Social Security and Medicare taxes), even if the student is not a degree candidate.

Coordination Restrictions

You cannot double dip. You cannot use the same expenses to justify both the exclusion from income for a scholarship and another education tax benefit, such as a tax-free distribution from a college savings plan or the American Opportunity Tax Credit.

Eligibility

Scholarship amounts used for tuition and required fees, as well as required textbooks, supplies and equipment may be excluded from income, if the student is a degree candidate.

Amounts used or earmarked for living expenses, such as room and board, are not eligible for the income exclusion.

Scholarships which that represent a fee for teaching, research or other services are not eligible for the exclusion from income. The main exceptions are for certain health professions scholarships, such as the National Health Service Corps Scholarship and the Armed Forces Health Professional Scholarship, and for tuition waivers and reductions for teaching and research assistants. Tuition waivers and reductions may not discriminate in favor of highly compensated employees.

There is no requirement that the college or university be accredited or eligible for Title IV federal student aid.

The exclusion from income for scholarships is available for an unlimited number of years.

Income Phaseouts

The exclusion from income for qualified scholarships is not subject to any income phaseouts.

Married students may use the exclusion from income for qualified scholarships even if they file separate federal income tax returns.

Expiration

The legislation authorizing the exclusion from income for qualified scholarships does not expire.

Reporting Scholarships

The tax-free portion of a scholarship or fellowship is not reported to the IRS.

The taxable portion of a scholarship or fellowship should be included in income in the line for “Wages, salaries, tips, etc.” (line 7 of IRS Form 1040 or 1040A, line 1 of IRS Form 1040EZ, line 12 of IRS Form 1040NR and line 5 of IRS Form 1040NR-EZ). If the taxable portion of the scholarship was not reported on IRS Form W-2, write “SCH” and the taxable amount in the space to the left of the line item on the federal income tax return.

Unless a scholarship represents a payment for teaching, research or other services (in which case the scholarship should be reported as wages on IRS Form W-2), scholarship providers are not required to file an IRS Form 1099, per the regulations at 26 CFR 1.6041-3. 

All scholarship amounts should be reported to the financial aid office of the student’s college, even if the amounts were paid directly to the family. The college may then make adjustments to the student’s need-based financial aid package, because receipt of a private scholarship reduces the student’s demonstrated financial need.  Some colleges will reduce the student’s unmet need and loans first, thereby, reducing the student’s net price. Other colleges will reduce grants first, yielding no net financial gain to the student.

References

Student Aid Policy Analysis Papers

Publications

Forms

Current Law

Note: These regulations do not appear to have been updated to reflect current law.

Legislative History

  • Internal Revenue Code of 1954, (Ch. 736, 68A Stat. 38, 8/16/1954), provided an unlimited exclusion from income for scholarships and fellowships received by degree candidates and a limited exclusion for non-degree candidates
  • Fulbright-Hays Act of 1961, (P.L. 87-256, 9/21/1961), expanded set of funding sources effective with the 1962 tax year
  • Tax Reform Act of 1976, (P.L. 94-455, 10/4/1976), clarified definition of eligible educational institution, effective with the 1977 tax year
  • Tax Treatment Extension Act of 1980, (P.L. 96-541, 12/17/1980), restricted exclusion to amounts that are not fee for services with exception for services required of all degree candidates, effective with the 1981 tax year
  • Deficit Reduction Act of 1984, (P.L. 98-369, 7/18/1984), added exclusion for tuition waivers, effective for education and tax years on or after 7/1/1985
  • Tax Reform Act of 1986, (P.L. 99-514, 10/22/1986), restricted exclusion from income to degree candidates, fee for services no longer eligible even if required of all degree candidates, amounts used or earmarked for living expenses or travel/research are no longer eligible for the exclusion, effective with the 1987 tax year
  • Technical and Miscellaneous Revenue Act of 1988, (P.L. 100-647, 11/10/1988), added exclusion from income for qualified tuition reductions offered with graduate student teaching and research assistantships, effective with the 1988 tax year
  • Increasing the Statutory Limit on the Public Debt, (P.L. 101-140, 11/8/1989), repealed provisions from the Tax Reform Act of 1986 relating to eligible employees
  • Small Business Job Protection Act of 1996, (P.L. 104-188, 8/20/1996), implemented technical correction
  • Economic Growth and Tax Relief Reconciliation Act of 2001, (P.L. 107-16, 6/7/2001), added temporary exception to the ban on fee for services for certain health professions scholarships

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