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IRS.gov Website
Publication 970
taxmap/pubs/p970-001.htm#en_us_publink1000177984

Chapter 1
Scholarships, Fellowships, Grants, and Tuition Reductions(p4)

Reminder(p4)


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Individual retirement arrangements (IRAs).(p4)
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.

taxmap/pubs/p970-001.htm#en_us_publink1000273660Introduction

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: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.
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Scholarships and Fellowships(p4)

rule
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.
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Amount of scholarship or fellowship.(p4)

rule
The amount of a scholarship or fellowship includes the following:
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Tax-Free Scholarships and Fellowships(p5)

rule
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: later.
Use Worksheet 1–1 to figure the amount of a scholarship or fellowship you can exclude from gross income.
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Candidate for a degree.(p5)

rule
You are a candidate for a degree if you:
  1. Attend a primary or secondary school or are pursuing a degree at a college or university, or
  2. Attend an educational institution that:
    1. 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
    2. Is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency.
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Eligible educational institution.(p5)

rule
An eligible educational institution is one whose primary function is the presentation of formal instruction and that normally 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.
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Qualified education expenses.(p5)

rule
For purposes of tax-free scholarships and fellowships, these are expenses for:
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Expenses that do not qualify.(p5)
Qualified education expenses do not include the cost of:
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Payment for services.(p5)

rule
Generally, you cannot exclude from your gross income the part of any scholarship or fellowship that represents payment for teaching, research, or other services required as a condition for receiving the scholarship. This applies even if all candidates for a degree must perform the services to receive the degree. (See below for exceptions.)
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Exceptions.(p5)
You do not have to treat as payment for services the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under:
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Example 1.(p5)

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.
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Example 2.(p5)

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.
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Athletic Scholarships(p5)

rule
An athletic scholarship is tax free only if and to the extent it meets the requirements discussed later.
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Worksheet 1-1.(p5)

rule
You can use Worksheet 1-1, Taxable Scholarship and Fellowship Income, later, to figure the tax-free and taxable parts of your athletic scholarship.
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Pencil

Worksheet 1-1. Taxable Scholarship and
Fellowship Income

1.Enter the total amount of any scholarship or fellowship for 2012. See Amount of Scholarship or Fellowship, earlier. 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, later, in this chapter.
   
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 13. 
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 35. 
6.Enter the amount of your qualified education expenses6. 
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 58. 
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. 
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Taxable Scholarships and Fellowships(p5)

rule
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.
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Reporting Scholarships and Fellowships(p6)

rule
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.
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How To Report(p6)

rule
How you report any taxable scholarship or fellowship income depends on which return you file.
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Form 1040EZ.(p6)

rule
If you file Form 1040EZ, include the taxable amount in the total on line 1. If the taxable amount was not reported on Form W-2, also enter "SCH" and the taxable amount in the space to the left of line 1.
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Form 1040A.(p6)

rule
If you file Form 1040A, include the taxable amount in the total on line 7. If the taxable amount was not reported on Form W-2, also enter "SCH" and the taxable amount in the space to the left of line 7.
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Form 1040.(p6)

rule
If you file Form 1040, include the taxable amount in the total on line 7. If the taxable amount was not reported on Form W-2, also enter "SCH" and the taxable amount on the dotted line next to line 7.
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Schedule SE (Form 1040).(p6)
To determine your net earnings from self-employment, include amounts you receive under a scholarship as pay for your services that are reported to you on Form 1099-MISC, Miscellaneous Income. If your net earnings are $400 or more, you must pay self-employment tax. Use Schedule SE, Self-Employment Tax, to figure this tax.
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Form 1040NR.(p6)

rule
If you file Form 1040NR, report the taxable amount on line 12. Generally, you must report the amount shown in box 2 of Form(s) 1042-S, Foreign Person's U.S. Source Income Subject to Withholding. See the Instructions for Form 1040NR for more information.
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Form 1040NR-EZ.(p6)

rule
If you file Form 1040NR-EZ, report the taxable amount on line 5. Generally, you must report the amount shown in box 2 of Form(s) 1042-S. See the Instructions for Form 1040NR-EZ for more information.