The following discussions deal with common types of educational assistance other than scholarships and fellowships.taxmap/pubs/p970-002.htm#en_us_publink1000178020
A Fulbright grant is generally treated as a scholarship or fellowship in figuring how much of the grant is tax free. Report only the taxable amount on your tax return. See Reporting Scholarships and Fellowships
on this page.
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. Report only the taxable amount on your tax return. See Reporting Scholarships and Fellowships
on this page.
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
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 13, 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 (BAH) 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 (explained in detail in chapter 2
). 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 BAH 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.taxmap/pubs/p970-002.htm#en_us_publink1000178028
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/p970-002.htm#en_us_publink1000178029
Qualified tuition reductions apply to officers, owners, or highly compensated employees only if benefits are available to employees on a nondiscriminatory basis. This means that the tuition reduction benefits must be available on substantially the same basis to each member of a group of employees. The group must be defined under a reasonable classification set up by the employer. The classification must not discriminate in favor of owners, officers, or highly compensated employees. taxmap/pubs/p970-002.htm#en_us_publink1000178030
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.
For purposes of the qualified tuition reduction, a child is a dependent child if the child is under age 25 and both parents have died. taxmap/pubs/p970-002.htm#en_us_publink1000178032
For purposes of the qualified tuition reduction, a dependent child of divorced parents is treated as the dependent of both parents. taxmap/pubs/p970-002.htm#en_us_publink1000178033
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.
Any tuition reduction that is taxable should be included as wages in box 1 of your Form W-2. Report the amount from Form W-2, box 1, on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ).