Scholarships and Fellowship Grants Policy
Scholarships are an amount paid 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 graduate. Section 117 of the IRC, as amended by Section 123 of the Tax Reform Act of 1986, states that payments received from a "qualified scholarship" (academic assistance awarded to a qualified degree candidate attending an accredited institution) are not reportable if the amount received is used to pay for tuition, fees, books, and any equipment that may be required for the course of instruction. At this time, the IRS does not require the reporting of such payments.
Fellowships are an amount paid or allowed to, or for the benefit of, an individual to aid in the pursuit of study or research.
Scholarship and fellowship grants that are used for other expenses, such as room and board, are to be reported by the recipient as taxable income. The IRS suggests that the administrator of the scholarship mail a letter to the recipient of the scholarship or fellowship advising them of the amount to be reported as taxable income.
Under the Immigration and Nationality Act, scholarships and fellowships received by nonresident aliens are exempt from tax as long as the recipient is a candidate for a degree at a qualified educational institution. If the student is a nonresident alien, and is not seeking a degree, then the scholarship or fellowship grant is subject to a 14 percent withholding tax and should be reported to the recipient on a 1042-S return. (See discussion on Nonresident Aliens )
In situations where the recipient is teaching performing research, or other services as a condition for receiving the scholarship or fellowship grant, the income is taxable and payments should be reported to the recipient on a W-2 return.
The exclusion for scholarships and grants does not apply to amounts received as a grant or that represent payment for teaching, research, or other service required as a condition of receiving the grant. The Supreme Court has found that payments received by employees on educational leave to study for Ph.D degrees were not excludable scholarships but taxable amounts representing compensation for past, present, or future employment services or amounts enabling the recipient to pursue studies or research primarily for the employer.
Non degree candidates may not exclude amounts under section 117; however, tax relief may be available under one of the other tax breaks for education related expenses.
Publication 520, Scholarships and Fellowships, is written for the recipients of the grants, and explains how and when to report the income on their individual income taxes. The publication provides some insight for the payer of these grants as to what is taxable, and reportable to the recipient. Publication 520 lists the following government programs that are considered scholarships or fellowships:
- Survivors' and Dependents' Educational Assistance benefits;
- Student loan interest subsidy payments made by the U. S. Department of Education;
- National Research Service awards received by individuals under the Public Health Service Act of 1974; and,
- Public Health Service awards to students enrolled in advanced courses of training for professional nurses are scholarships.