| Pub. 970, Tax Benefits for Education |
2006 Tax Year |
1.
Scholarships, Fellowships, Grants, and Tuition Reductions
This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Individual retirement arrangements (IRAs). 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 Form W-2, Wage and Tax Statement. For more information about IRAs, see Publication
590.
This chapter discusses the 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:
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Scholarships,
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Fellowships,
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Need-based education grants, such as a Pell Grant, and
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Qualified tuition reductions.
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.
Scholarships and Fellowships
A scholarship is generally an amount paid or allowed to, or 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 a graduate.
A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study
or research.
Table 1-1
provides an overview of the tax treatment of amounts received as a scholarship or fellowship
(other than amounts received as payment for services). Generally, whether the amount is tax free or taxable depends on the
expense paid with the
amount and whether you are a degree candidate.
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Table 1-1.
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Tax Treatment of Scholarship and Fellowship Payments
1 |
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Do not rely on this table alone. Refer to the text for complete details. |
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AND you are...
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THEN your payment is...
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IF you use the payment for...
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A degree
candidate
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Not a
degree
candidate
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Tax free
2 |
Taxable
|
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Tuition
|
X
|
|
X
|
|
| |
|
X
|
|
X
|
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Fees
|
X
|
|
X
3 |
|
| |
|
X
|
|
X
|
|
Books
|
X
|
|
X
3 |
|
| |
|
X
|
|
X
|
|
Supplies
|
X
|
|
X
3 |
|
| |
|
X
|
|
X
|
|
Equipment
|
X
|
|
X
3 |
|
| |
|
X
|
|
X
|
|
Room
|
X
|
|
|
X
|
| |
|
X
|
|
X
|
|
Board
|
X
|
|
|
X
|
| |
|
X
|
|
X
|
|
Travel
|
X
|
|
|
X
|
| |
|
X
|
|
X
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| 1 Does not include payments received for past, present, or future services.
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2 Payments used for any expenses indicated in this column are tax free only if the
terms of the scholarship or fellowship do not prohibit the expense.
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| 3 If required of all students in the course.
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Tax-Free Scholarships and Fellowships
A scholarship or fellowship is tax free only if:
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You are a candidate for a degree at an eligible educational institution, and
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You use the scholarship or fellowship to pay qualified education expenses.
Candidate for a degree.
You are a candidate for a degree if you:
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Attend a primary or secondary school or are pursuing a degree at a college or university, or
-
Attend an accredited educational institution that is authorized to provide:
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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.
Eligible educational institution.
An eligible educational institution is one that 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.
Qualified education expenses.
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.
However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require
that it be used for
other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses.
Expenses that do not qualify.
Qualified education expenses do not include the cost of:
This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship
amounts used
to pay these costs are taxable.
Worksheet 1.1.
You can use Worksheet 1-1 to figure the tax-free and taxable parts of your scholarship or fellowship.
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Worksheet 1-1.Taxable Scholarship and Fellowship Income |
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1.
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Enter your scholarship or fellowship income for 2006
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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.
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2.
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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 Service Corps Scholarship Program or the Armed Forces Health Professions
Scholarship and
Financial Assistance Program.)
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2.
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3.
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Subtract line 2 from line 1
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3.
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4.
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Enter the amount from line 3 that your scholarship or fellowship required you to use for
other than qualified education expenses
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4.
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5.
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Subtract line 4 from line 3
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5.
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6.
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Enter the amount from line 5 that was used for qualified education expenses required for study at an
eligible educational institution. This amount is the tax-free part of your scholarship or fellowship income*
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6.
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7.
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Subtract line 6 from line 5
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7.
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8.
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Taxable part. Add lines 2, 4, and 7. See Reporting Scholarships and
Fellowships for how to report this amount on your tax return
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8.
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* If you qualify for other education benefits (see chapters 2 through 12), you may have to reduce the amount of education
expenses qualifying
for a specific
benefit by the tax-free amount on this line.
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An athletic scholarship is tax free if it meets the requirements discussed above.
Taxable Scholarships and Fellowships
If your scholarship or fellowship does not meet the requirements described earlier, it is taxable. The following amounts received
may be taxable.
Each type is discussed below.
Amounts used to pay expenses that do not qualify.
A scholarship amount you use to pay any expense that does not qualify is taxable, even if the expense is a fee that
you must pay to the institution
as a condition of enrollment or attendance.
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.
Exceptions.
You do not have to include in income 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,
and you:
-
Are a candidate for a degree at an eligible educational institution, and
-
Use that part of the scholarship or fellowship to pay qualified education expenses.
Example 1.
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. You used all the money for qualified education expenses. Assuming
that all other
conditions are met, $1,500 of your scholarship 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 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.
Scholarship prizes.
If you win a scholarship as a prize in a contest, the scholarship is fully taxable unless you meet the requirements
discussed earlier under
Tax-Free Scholarships and Fellowships.
Reporting Scholarships and Fellowships
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.
How you report any taxable scholarship or fellowship income depends on which return you file.
Form 1040EZ.
If you file Form 1040EZ, report the taxable amount on line 1. If the taxable amount was not reported on Form W-2,
enter “ SCH” and the taxable
amount in the space to the left of line 1.
Form 1040A.
If you file Form 1040A, report the taxable amount on line 7. If the taxable amount was not reported on Form W-2, enter
“ SCH” and the taxable
amount in the space to the left of line 7.
Form 1040.
If you file Form 1040, report the taxable amount on line 7. If the taxable amount was not reported on Form W-2, enter
“ SCH” and the taxable
amount on the dotted line next to line 7.
Schedule SE (Form 1040).
Include amounts you receive under a scholarship as pay for your services as an independent contractor in determining
your net earnings from
self-employment. If your net earnings are $400 or more, you will have to pay self-employment tax. Use Schedule SE, Self-Employment
Tax, to figure this
tax.
For more information in determining whether you are an independent contractor or an
employee, get Publication 15-A, Employer's Supplemental Tax Guide.
Form 1040NR.
If you file Form 1040NR, report the taxable amount on line 12. You must generally report the amount shown in Form(s)
1042-S, box 2. See the
instructions for Form 1040NR for more information on reporting fellowship and scholarship income on Form 1040NR.
Form 1040NR-EZ.
If you file Form 1040NR-EZ, report the taxable amount on line 5. You must generally report the amount shown in Form(s)
1042-S, box 2. See the
instructions for Form 1040NR-EZ for more information on reporting fellowship and scholarship income on Form 1040NR-EZ.
Other Types of Educational Assistance
The following discussions deal with common types of educational assistance other than scholarships and fellowships.
A Fulbright grant is generally treated as a scholarship or fellowship in figuring how much of the grant is tax free. You have
to report only the
taxable amount. See Reporting Scholarships and Fellowships earlier in this chapter.
Pell Grants and Other Title IV Need-Based Education Grants
These need-based grants 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. You have to report only the taxable amount. See
Reporting
Scholarships and Fellowships earlier in this chapter.
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 and will be reported to you in box 1 of Form W-2. Include this pay in your income
in the year you
receive it unless one of the exceptions, discussed earlier under Payment for services, applies.
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.
If you qualify for one or more of the education benefits discussed in chapters 2 through 12, you may have to reduce the amount
of education
expenses qualifying for a specific benefit by part or all of your VA payments. This applies only to the part of your VA payments
that is required to
be used for education expenses.
Qualified Tuition Reduction
If you are allowed to study tuition free or for a reduced rate of tuition, you may not have to pay tax on this benefit. This
is called a “tuition
reduction.” You do not have to include a qualified tuition reduction in your income.
A tuition reduction is qualified only if you receive it from an eligible educational institution and use it at an eligible
educational institution.
You do not have to use the tuition reduction at the eligible educational institution from which you received it. In other
words, if you work for an
educational institution and the institution arranges for you to take courses at another educational institution without paying
any tuition, you may
not have to include the value of the free courses in your income.
The rules for determining if a tuition reduction is qualified, and therefore tax free, are different if the education provided
is below the
graduate level or is graduate education.
You must include in your income any tuition reduction you receive that is payment for your services.
Eligible educational institution.
An eligible educational institution is one that 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.
Officers, owners, and highly compensated employees.
Qualified tuition reductions apply to officers, owners, or highly compensated employees only if benefits are available
to employees on a
nondiscriminatory basis. This means that the tuition reduction benefits must be available on substantially the same basis
to each member of a group of
employees. The group must be defined under a reasonable classification set up by the employer. The classification must not
discriminate in favor of
owners, officers, or highly compensated employees.
Education Below the Graduate Level
If you receive a tuition reduction for education below the graduate level (including primary, secondary, proprietary, or high
school), it is a
qualified tuition reduction, and therefore tax free, only if your relationship to the educational institution providing the
benefit is described
below.
-
You are an employee of the eligible educational institution.
-
You were an employee of the eligible educational institution, but you retired or left on disability.
-
You are a widow or widower of an individual who died while an employee of the eligible educational institution or who retired
or left on
disability.
-
You are the dependent child or spouse of an individual described in (1) through (3), above.
Child of deceased parents.
For purposes of the qualified tuition reduction, a child is a dependent child if the child is under age 25 and both
parents have died.
Child of divorced parents.
For purposes of the qualified tuition reduction, a dependent child of divorced parents is treated as the dependent
of both parents.
A tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following requirements
are met.
You must include in income any other tuition reductions for graduate education that you receive.
Any tuition reduction that is taxable should be included as wages in box 1 of your Form W-2. Report the amount in box 1 on
line 7 (Form 1040 or
Form 1040A) or line 1 (Form 1040EZ).
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