Publication 520 |
2001 Tax Year |
Scholarships & Fellowships
This part explains whether your scholarship or fellowship is tax
free.
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.
A fellowship is generally an amount paid for the benefit
of an individual to aid in the pursuit of study or research.
Tax-Free Scholarships and Fellowships
A scholarship or fellowship is tax free only if:
- You are a candidate for a degree at an educational
institution, and
- The grant is a qualified scholarship or
fellowship.
Table 1. Tax Treatment of Scholarship and Fellowship Payments
Candidate for a degree.
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 a college or university, or
- Attends 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.
Educational institution.
An educational institution maintains a regular faculty and
curriculum and has a regularly enrolled body of students in attendance
at the place where it carries on its educational activities.
Qualified scholarship or fellowship.
A qualified scholarship or fellowship is any amount you receive as
a scholarship or fellowship grant that is used under the terms of the
grant for:
- Tuition and fees paid to enroll in, or to attend, an
educational institution, or
- Fees, books, supplies, and equipment that are required for
the courses at the educational institution. These items must be
required of all students in your course of instruction.
Your scholarship or fellowship grant can still qualify as tax free
even if the terms do not provide that it be used only for tuition and
course-related expenses. It will qualify if you use the grant proceeds
for tuition and course-related expenses. However, if the terms of the
grant require its use for other purposes, such as room and board, or
specify that the grant cannot be used for tuition or course-related
expenses, the amounts received under the grant are not tax free.
You can use Table 2 to figure the tax-free and taxable parts of
your scholarship or fellowship.
Table 2. Scholarship and Fellowship Income Worksheet
Athletic scholarships.
Athletic scholarships are tax free if they meet the requirements
discussed above.
Fulbright grants.
A Fulbright grant is generally treated as any other scholarship or
fellowship in figuring how much of the grant is tax free. If you
receive a Fulbright grant for lecturing or teaching, it is payment for
services and is taxable. A special rule applies if the grant was paid
in nonconvertible foreign currency. See Payment of Tax by
Fulbright Grantees under Individuals Abroad, later.
A Fulbright grant is a grant under the Mutual Educational and
Cultural Exchange Act of 1961, known as the Fulbright-Hays Act. If you
receive a supplemental grant under the U.S. Information and
Educational Exchange Act of 1948 (Smith-Mundt Act) for study,
research, or teaching abroad, it is treated like a Fulbright grant.
Pell Grants, Supplemental Educational Opportunity Grants, and
Grants to States for State Student Incentives.
These grants are tax free if they are used for qualifying tuition
and course-related expenses during the grant period.
Veterans' benefits.
Payments you receive for education, training, or subsistence under
any law administered by the Department of Veterans Affairs (VA) are
tax free. But you may have to reduce your deduction for educational
expenses by the amount of these tax-free payments. For more
information, see Publication 508.
Deductible educational expenses.
If your scholarship or fellowship grant is tax free, you must
reduce your deductible educational expenses by the amount of the grant
you receive for those expenses. Your educational expenses, such as
tuition, fees, books, and supplies, are ordinarily deductible if they
are used to maintain or improve skills in your present work, or to
retain your job or rate of pay. See Publication 508
for more
information.
Taxable Scholarships and Fellowships
If your scholarship or fellowship does not meet the rules described
earlier, it is taxable. The following are examples of amounts that are
taxable.
Incidental expenses.
An amount you receive for incidental expenses is not a tax-free
qualified scholarship. Incidental expenses are expenses for items that
are not required for either enrollment or attendance at an educational
institution, or in a course of instruction at the educational
institution. Incidental expenses include:
- Room and board,
- Travel,
- Research,
- Clerical help, and
- Equipment.
Example.
You receive a scholarship from State University to enroll in a
writing course. Suggested supplies for the writing course include a
word processor. Amounts used for suggested supplies are not qualified
scholarship expenses. You cannot include the cost of a word processor
to determine the amount received as a qualified scholarship.
Payment for services.
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.
Example 1.
You received a scholarship of $2,500. 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
grantor gives you a Form W-2 showing $1,000 as income. You used
all the money for tuition and course-related expenses. Assuming that
all other conditions are met, $1,500 of your grant is tax-free. The
$1,000 you received for teaching is taxable.
Example 2.
You are a candidate for a degree at a medical school. You receive
a government grant for your medical education and training. The terms
of the grant require you to perform a period of obligated service in a
designated medically underserved area of the country following
completion of your medical studies. 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.
You can deduct ordinary and necessary business expenses if you
itemize deductions on Schedule A (Form 1040). See Publication 529,
Miscellaneous Deductions.
Payments to service academy cadets.
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. Include this pay in your income in the year
you receive it.
Scholarship prizes.
Cash scholarship prizes won in a contest 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 that you can use only when enrolled as a candidate for a degree
at a college is a qualified scholarship.
Additional Information
If there is some doubt about the tax treatment of your grant,
consult the grantor. The grantor may have received advice from the IRS
about the appropriate tax treatment of the grant. You can also contact
the District Director of Internal Revenue for the district in which
you live. Be sure to ask for the information as soon as possible so
that you can receive an answer in time to file your return. If you
request this advice by mail, give a complete statement of all the
facts.
Reporting Scholarships and Fellowships
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 next. 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 payor for a corrected one.
Form 1040EZ.
Include on line 1 the taxable amount not reported on Form
W-2. Print "SCH" and the amount not reported to the right
of the words "W-2 form(s)" on line 1.
Form 1040 or 1040A.
Include the taxable amount not reported on Form W-2 on line
7. Print "SCH" and the amount not reported on the dotted line
next to line 7 on Form 1040 or in the space to the left of line 7 on
Form 1040A.
Schedule SE (Form 1040).
Amounts you receive under a grant that represent pay for your
services as an independent contractor are included in determining net
earnings from self-employment. If your net earnings are $400 or more,
you will have to pay self-employment tax. Use Schedule SE to figure
this tax.
Whether you are an independent contractor or employee depends on
the facts in your situation. The general rule is that you are an
independent contractor if the payer has the right to control or direct
only the result of the work and not what will be done and how it will
be done.
You are not an independent contractor if you perform services that
can be controlled by an employer (what will be done and how it will be
done). This applies even if you are given freedom of action. What
matters is that the employer has the legal right to control the
details of how the services are performed. If an employer-employee
relationship exists (no matter what the relationship is called), you
are not an independent contractor.
For more information in determining whether you are an independent
contractor or an employee, get Publication 15-A,
Employer's
Supplemental Tax Guide.
When To File
The due date for filing your return is April 15. If April 15 falls
on a Saturday, Sunday, or legal holiday, the due date is the next
business day.
Federal tax returns are filed on time if they bear an official
postmark dated by midnight of the due date or extended due date. If
they are not postmarked by the due date or extended due date, they are
filed when they are received by the IRS.
See your tax form instructions for names of designated private
delivery services that you can use to meet the timely filing and
payment rules.
Extensions of time to file.
There are several exceptions to the filing deadline.
Automatic 4-month extension.
You can get an automatic 4-month extension of time to file
your tax return by filing Form 4868, Application for Automatic
Extension of Time To File U.S. Individual Income Tax Return.
This 4-month extension is not in addition to the automatic
extension until June 15, discussed next. You must file Form 4868 by
the due date for filing your return, including the automatic extension
until June 15, if applicable. In filling out Form 4868, you must make
an accurate estimate of your tax for the year. If you find you cannot
pay the full amount due with Form 4868, you can still get the
extension, but you will be charged interest from the original due date
to the date the tax is paid. For additional information, get Form
4868.
Enter any payment you made with the application for extension form
on Form 1040, Form 1040A, or 1040EZ. You cannot choose to have the IRS
figure your tax if you use the extension of time to file.
Automatic extension until June 15.
If you are a U.S. citizen or resident, you may qualify for an
automatic extension of time until June 15 to file your return and pay
any tax due if you meet one of the following conditions on the regular
due date of your return.
- You are living outside of the United States and Puerto Rico,
and your main place of business or post of duty is outside the United
States and Puerto Rico.
- You are in military service on duty outside the United
States and Puerto Rico on the due date of the return.
You must attach a statement to your return explaining that you meet
one of the above conditions. You must pay interest on any unpaid tax
from the regular due date up to the date you pay the tax.
If you and your spouse file a joint return, only one of you needs
to meet a condition on April 15 to qualify for the automatic extension
to June 15. If you and your spouse file separate returns, only the
spouse who met a condition on April 15 qualifies for the automatic
extension.
Where To File
If you are living in the United States, send your return to the
appropriate Internal Revenue Service Center address listed in the
instructions to your federal tax return.
If you are studying or teaching abroad under a grant, send your
return to the Internal Revenue Service Center, Philadelphia, PA 19255
U.S.A.
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