Individual retirement arrangements (IRAs).(p5)
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 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.taxmap/pubs/p970-001.htm#en_us_publink100020722
A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate.
A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.
Table 1-1 provides an overview of the tax treatment of amounts received as a scholarship or fellowship (other than amounts received as payment for services). Generally, whether the amount is tax free or taxable depends on the expense paid with the amount and whether you are a degree candidate.
Table 1-1. Tax Treatment of Scholarship and Fellowship Payments1 Do not rely on this table alone. Refer to the text for complete details.
| ||AND you are...||THEN your payment is...|
|IF you use the payment for...||A degree|
|Tuition||X|| ||X|| |
| || ||X|| ||X|
|Fees||X|| ||X3|| |
| || ||X|| ||X|
|Books||X|| ||X3|| |
| || ||X|| ||X|
|Supplies||X|| ||X3|| |
| || ||X|| ||X|
|Equipment||X|| ||X3|| |
| || ||X|| ||X|
|Room||X|| || ||X|
| || ||X|| ||X|
|Board||X|| || ||X|
| || ||X|| ||X|
|Travel||X|| || ||X|
| || ||X|| ||X|
|1 Does not include payments received for past, present, or future services. |
|2 Payments used for any expenses indicated in this column are tax free only if the |
terms of the scholarship or fellowship do not prohibit the expense.
|3 If required of all students in the course. |taxmap/pubs/p970-001.htm#en_us_publink100020724
A scholarship or fellowship is tax free only if:
- You are a candidate for a degree at an eligible educational institution, and
- You use the scholarship or fellowship to pay qualified education expenses.
You are a candidate for a degree if you:
- Attend a primary or secondary school or are pursuing a degree at a college or university, or
- Attend an accredited educational institution that is authorized to provide:
- A program that is acceptable for full credit toward a bachelor's or higher degree, or
- A program of training to prepare students for gainful employment in a recognized occupation.
An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. taxmap/pubs/p970-001.htm#en_us_publink100020726
For purposes of tax-free scholarships and fellowships, these are expenses for:
- 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.
However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses.
Qualified education expenses do not include the cost of:
- Room and board,
- Clerical help, or
- Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.
This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable.
You can use Worksheet 1-1 to figure the tax-free and taxable parts of your scholarship or fellowship.
Worksheet 1-1. Taxable Scholarship and Fellowship Income
|1.||Enter your scholarship or fellowship income for 2008||1.|| || |
| || |
- If you are a degree candidate at an eligible educational institution, go to line 2.
- If you are not a degree candidate at an eligible educational institution, stop here. The entire amount is taxable. For information on how to report this amount on your tax return, see Reporting Scholarships and Fellowships.
| || || |
|2.||Enter the amount from line 1 that was for teaching, research, or any other services. (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 from line 5 that was used for qualified education expenses required for study at an eligible educational institution. This amount is the tax-free part of your scholarship or fellowship income* ||6.|| || |
|7.||Subtract line 6 from line 5||7.|| || |
|8.||Taxable part. Add lines 2, 4, and 7. See Reporting Scholarships and Fellowships for how to report this amount on your tax return ||8.|| || |
|* If you qualify for other education benefits (see chapters 2 through 12), you may have to reduce the amount of education expenses qualifying for a specific |
benefit by the tax-free amount on this line.
An athletic scholarship is tax free if it meets the requirements discussed above. taxmap/pubs/p970-001.htm#en_us_publink100020730
If your scholarship or fellowship does not meet the requirements described earlier, it is taxable. The following amounts received may be taxable.
- Amounts used to pay expenses that do not qualify.
- Payments for services.
- Scholarship prizes.
Each type is discussed below.
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.taxmap/pubs/p970-001.htm#en_us_publink100020732
Generally, you must include in income the part of any scholarship, fellowship, or tuition reduction that represents payment for past, present, or future teaching, research, or other services. This applies even if all candidates for a degree must perform the services to receive the degree. taxmap/pubs/p970-001.htm#en_us_publink100020733
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 you receive the amount under:
- The National Health Service Corps Scholarship Program, or
- The Armed Forces Health Professions Scholarship and Financial Assistance Program,
- 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.
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. You used all the money for qualified education expenses. Assuming that all other conditions are met, $1,500 of your scholarship is tax free. The $1,000 you received for teaching is taxable. taxmap/pubs/p970-001.htm#en_us_publink100020735
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. taxmap/pubs/p970-001.htm#en_us_publink100020736taxmap/pubs/p970-001.htm#en_us_publink100020737
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.taxmap/pubs/p970-001.htm#en_us_publink100020738
How you report any taxable scholarship or fellowship income depends on which return you file.taxmap/pubs/p970-001.htm#en_us_publink100020739
If you file Form 1040EZ, report the taxable amount on line 1. If the taxable amount was not reported on Form W-2, enter "SCH" and the taxable amount in the space to the left of line 1. taxmap/pubs/p970-001.htm#en_us_publink100020740
If you file Form 1040A, report the taxable amount on line 7. If the taxable amount was not reported on Form W-2, enter "SCH" and the taxable amount in the space to the left of line 7. taxmap/pubs/p970-001.htm#en_us_publink100020741
If you file Form 1040, report the taxable amount on line 7. If the taxable amount was not reported on Form W-2, enter "SCH" and the taxable amount on the dotted line next to line 7. taxmap/pubs/p970-001.htm#en_us_publink100020742
Include amounts you receive under a scholarship as pay for your services as an independent contractor in determining your net earnings from self-employment. If your net earnings are $400 or more, you will have to pay self-employment tax. Use Schedule SE, Self-Employment Tax, to figure this tax.
For more information on determining whether you are an independent contractor or an employee, get Publication 15-A, Employer's Supplemental Tax Guide.taxmap/pubs/p970-001.htm#en_us_publink100020743
If you file Form 1040NR, report the taxable amount on line 12. You must generally report the amount shown in Form(s) 1042-S, box 2. See the Instructions for Form 1040NR for more information on reporting fellowship and scholarship income on Form 1040NR.taxmap/pubs/p970-001.htm#en_us_publink100020744
If you file Form 1040NR-EZ, report the taxable amount on line 5. You must generally report the amount shown in Form(s) 1042-S, box 2. See the Instructions for Form 1040NR-EZ for more information on reporting fellowship and scholarship income on Form 1040NR-EZ.