Given the I.R.S. broad definition of income, it may surprise you that most scholarship awards are not taxable. Scholarships or fellowships that are used for “qualified” tuition or related expenses fall into this category. Awards for tuition, books, fees, supplies and required equipment generally meet the definition of “qualified” expenses.

Here are a few “tax takeaways” that can help you navigate the tax treatment of scholarships. As with most tax rules, the devil is in the details. There are often exceptions and need for further explanation.

1. Qualified scholarships do not include awards for room and board, incidental expenses, travel, or cost of research.

2. Scholarship recipients may attend full or part time, but must be a degree candidate.

3. Athletic scholarships are tax free to the extent provided above. The fair market value of room and board payments are reported as taxable income.

4. Any payment for work done as a condition for receiving a scholarship is considered taxable income.

5. Veterans payments such as GI bill, vocational rehabilitation payments, and dependent education program payments are not included in income, and are not considered scholarships or fellowship grants.

6. Reduced tuition under a qualified “Tuition Reduction Program” is generally a non-taxable benefit given to school employees, their spouses and their children. In most cases, this exclusion applies only for education below the graduate level.

7. If a portion of an educational scholarship is taxable, or if the scholarship does not pay for the full amount of the student’s expenses, KEEP RECEIPTS for other expenses. There may be ways to reduce taxable income by deducting other educational expenses. In addition, taxpayers may be able to take advantage or significant education credits (the American Opportunity Tax Credit or Lifetime Learning Tax Credit) to further reduce annual tax liability.

[1] The author, Bryan Corcoran, Esq, is a retired Marine Judge Advocate. He earned his J.D. and Masters in Taxation from the University of Akron in 1997. He is currently a Tax Analysts for Heritage Income Tax. The views expressed in this paper are his own, and are not intended as a substitute for professional tax planning or legal advice.

[2] 26 U.S.C. § 117(a)

[3] 26 U.S.C. § 117(b)(2)

[4] I.R.S. Pub 970, page 6

[5] I.R.S. Pub 525, page 34

[6] Id.

[7] 26 U.S.C. § 117(d)(2)