Important Reminders

Estimated tax.   You may have to pay estimated tax if the grantor of a scholarship or fellowship does not withhold tax or withholds insufficient tax on the taxable part of your scholarship or fellowship grant. For more information, see Estimated Tax, later.

Individual retirement arrangements (IRAs).   You can set up and make contributions to an IRA if you received taxable compensation. Under this rule, a taxable scholarship or fellowship is compensation only if it is shown in box 1 of Form W-2, Wage and Tax Statement. For more information about IRAs, see Publication 590, Individual Retirement Arrangements (IRAs).

Photographs of missing children.   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

This publication covers the rules for scholarships, fellowships, and tuition reductions. These amounts are tax free if they meet the rules discussed in this publication.

This publication also discusses the estimated tax rules and some of the special rules that apply to U.S. citizens and resident aliens who are studying, teaching, or researching abroad under scholarships and fellowships.

This publication does not discuss certain items that are covered in other publications. These include:

• Hope and lifetime learning credits, Coverdell education savings accounts, qualified tuition programs, and other tax benefits for education. See Publication 970, Tax Benefits for Education.
• Student loans that were canceled or forgiven. See Publication 525, Taxable and Nontaxable Income.
• Scholarships and fellowships paid to nonresident aliens. See Publication 519, U.S. Tax Guide for Aliens.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at www.irs.gov.

You can write to us at the following address:

Internal Revenue Service
Technical Publications Branch
W:CAR:MP:FP:P
1111 Constitution Ave. NW
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Useful Items You may want to see:

Publication

• 54   Tax Guide for U.S. Citizens and Resident Aliens Abroad
• 501   Exemptions, Standard Deduction, and Filing Information
• 505   Tax Withholding and Estimated Tax
• 508   Tax Benefits for Work-Related Education
• 514   Foreign Tax Credit for Individuals
• 525   Taxable and Nontaxable Income
• 901   U.S. Tax Treaties
• 970   Tax Benefits for Education

Form (and Instructions)

• 1040   U.S. Individual Income Tax Return
• 1040A   U.S. Individual Income Tax Return
• 1040EZ   Income Tax Return for Single and Joint Filers With No Dependents
• 1040ES   Estimated Tax for Individuals

See How To Get Tax Help near the end of this publication for information about getting these publications and forms.

Scholarships and 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.

Table 1 provides an overview of the tax treatment of scholarship and fellowship payments received by an individual who is, or is not, a degree candidate.

Tax-Free Scholarships and Fellowships

A scholarship or fellowship is tax free only if:

1. You are a candidate for a degree at an educational institution, and
2. The grant is a qualified scholarship or fellowship.

Table 1. Tax Treatment of Scholarship and Fellowship Payments

Payment for	Degree candidate	Not a degree candidate
Tuition	Tax free	Taxable
Fees	Tax free 1	Taxable
Books	Tax free 1	Taxable
Supplies	Tax free 1	Taxable
Equipment	Tax free 1	Taxable
Room	Taxable	Taxable
Board	Taxable	Taxable
Travel	Taxable	Taxable
Teaching	Taxable 2	Taxable
Research services	Taxable 2	Taxable
Other services	Taxable 2	Taxable

1 If required of all students in the course

2 Does not include amounts received under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.

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:

1. Attends a primary or secondary school or is pursuing a degree at a college or university, or
2. Attends an accredited educational institution that is authorized to provide:
   1. A program that is acceptable for full credit toward a bachelor's or higher degree, or
   2. 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 required 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 Worksheet A to figure the tax-free and taxable parts of your scholarship or fellowship.

Worksheet A. Scholarship and Fellowship Income Worksheet

1.	Enter your scholarship or fellowship income	1.
	If you are a degree candidate, go to line 2. If you are not a degree candidate, stop here. The entire amount is taxable. See Reporting Scholarships and Fellowships for how to report this amount on your tax return.
2.	Enter the amount from line 1 that was for teaching, research, or any other services (Do not include amounts received for these items under the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.)	2.
3.	Subtract line 2 from line 1	3.
4.	Enter the amount from line 1 (except any amount entered on line 2) used for tuition and course-related fees, books, supplies, and equipment required for study at an educational institution	4.
5.	Subtract line 4 from line 3	5.
6.	Taxable part. Add line 2 and line 5. See Reporting Scholarships and Fellowships for how to report this amount on your tax return	6.

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 and other Title IV need-based education grants.   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.

Qualified education expenses reduced.   Education credits, certain deductions, and exclusions from income are based on your qualified education expenses. You must reduce your qualified education expenses by your tax-free qualified scholarship or fellowship grant, tax-free veterans' education benefits, and any other tax-free education benefits. Use your reduced qualified expenses to determine any of the following amounts that apply to you.

• Hope credit.
• Lifetime learning credit.
• Interest deduction on student loans.
• Withdrawals from IRAs that are not subject to 10% additional tax.
• Exclusion from income of interest earned on U.S. Savings Bonds that have been cashed in.
• Deduction as an adjustment to income for qualified tuition and related expenses.
• Deduction for work-related education expenses.

For more information on work-related education expenses, see Publication 508. For more information on all other topics in the above list, see Publication 970.

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 computer. Amounts used for suggested supplies are not qualified scholarship expenses. You cannot include the cost of a computer to determine the amount received as a qualified scholarship.

Payment for services.   Generally, 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 unless it is received under a program for which an exception, discussed next, applies.

Exceptions.    You do not have to include in income the part of any scholarship, fellowship, or tuition reduction representing 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.

Payment 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 unless an exception, discussed above, applies.

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.

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