CARL WATTS & ASSOCIATES

November 18, 2013

www.carlwatts.com
office@carlwatts.com
Washington DC
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There is quite a variety of educational assistance you may receive if you are studying, teaching, or researching in the United States, be it for a primary or secondary school, a college or university, or a vocational school.

As you probably know, 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 amount of a scholarship or fellowship includes the following:

  • 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.


If you have a scholarship or fellowship, you should know that it is tax free (meaning excludable from gross income) only if you are a candidate for a degree at an eligible educational institution.

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:

    a.
    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

    b.
    Is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency.

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.

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.

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.
Taxation on Scholarship
& Fellowship Grants
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The most common taxable scholarship covers room and board. Other scholarships that cover internships, art projects or research are also considered taxable income. Scholarships and grants that are awarded through competitions and do not specifically pertain to tuition or other allowable fees are also taxable.

Clerical help, or equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution are also not included in qualified education expenses.

As a general rule, you cannot exclude from your gross income amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant. Also you must include in income any part of the scholarship or fellowship that represents payments for services. Generally when reporting scholarship income on your tax return, you will include the amounts on the same line as “Wages, salaries, tips, etc.”

Of course, there are exceptions here also, specifically 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 The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program.

Colleges provide students with Form 1098-T to help students determine the taxable and tax-free portions of their scholarships and grants provided by the institution. Outside institutions or programs that make scholarship/grant awards will provide the student with a W2 form.

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 whether or not you received a Form W-2.

As you probably know, there are other common types of educational assistance.

There is, for instance, the Fulbright grant, which is generally treated as a scholarship or fellowship in figuring how much of the grant is tax free.

We should also mention the Pell Grants and other Title IV Need-Based Education Grants, which 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.

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.

Let us not forget about the two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax, the American Opportunity Credit and the Lifetime Learning Credit, to which we have dedicated a previous newsletter.

The decision to further your education is doubtless a commendable step in everybody’s life, but, no matter what your resources are, you should always be aware and take advantage of all the tax credits and educational assistance that is available to you or your children. Therefore, help from a financial or tax advisor is the right choice.