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.

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

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 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.