Tax Implications

If you are wondering if scholarships and fellowships are taxable, rest assured that most are tax-free. Yet it is also important to note that the Internal Revenue Service (IRS) does include strict guidelines as part of its code. Please note that we are not tax specialists; we strongly recommend that you speak with your tax advisor or college’s financial aid or scholarship department about the tax implications of your scholarship awards.

 

IRS Guidelines

The information in this section comes directly from Publication 520 from the IRS entitled, Scholarships and Fellowships.

 

Definitions

• A scholarship is generally an amount paid 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 graduate student.

• A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.

 

Tax-free or Not?

• A scholarship ship is tax-free if you are a candidate for a degree at an educational institution, and/or the grant is a qualified scholarship or fellowship.

– The term candidate for a degree means a student (full or part-time) who attends a primary or secondary school, or is pursuing a degree at an accredited college or university, or attends a properly licensed 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.

– A qualified scholarship or fellowship is any amount a student receives as a scholarship or fellowship that is used for tuition and fees to enroll in or to attend an educational institution, or to purchase books, supplies, and equipment that are required of the courses at the school the student plans to attend. These items must be required of all students in the course of instruction.

• A scholarship or fellowship can still qualify as tax-free, even if the terms do not provide that it be used only for tuition and course-related expenses but you use it in this way. However, if the terms of the grant require its use for other purposes, such as room and board, or it specifies that it cannot be used for tuition or course-related expenses, the amount(s) received are not tax-free.

• Pell Grants, Supplement Educational Opportunity Grants and Grants for State Student Incentives are tax-free if they are used for qualifying tuition and course-related expenses during the scholarship period.

• Scholarship prizes are cash won in a contest and are not scholarships if you do not have to use the prizes for educational purposes. These prizes are taxable regardless of how you use the money. A scholarship prize can be used when the candidate is enrolled at a college for a degree.

 

Additional Information

If you have questions regarding the tax treatment of your scholarship, please consult with the organization from which you receive the scholarship, which may have advice from the IRS about the appropriate tax treatment of the award. You can also contact the District Director of the IRS for the district in which you reside. Be sure to ask for the information as soon as possible so that you can receive the answer in time to file a tax return, if necessary.

You may also want to contact the IRS through its website, or call the IRS at 800-829-1040 (hearing impaired TTY: 800-829-4059).

We also recommend you contact your tax adviser.

 

Publications and forms

To order free IRS publications and forms, visit the IRS website or call 800-829-3676. You can also write to the IRS Forms Distribution Center nearest you. The IRS’ Publication 910 Guide to Free Tax Services contains an index of tax topics and related publications, as well as additional free tax information.

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