Understanding the Tax Implications of Grants and Fellowships

For many students, receiving a grant or fellowship can provide a welcome break from increasing student loan debt. They can assist in covering expenses, as well as rewarding a student for their hard work. However, the question may come up whether or not these grants and fellowships have any tax implications for the student who receives them. In order to determine your particular tax liability, it is important to discuss your situation with a tax professional, such as HCS, LLC in North Richland Hills, TX.

What is a Scholarship or Fellowship Grant?

A scholarship is generally a defined amount of funds are paid to the benefit of a student (either undergraduate or graduate) at a particular educational institution to aid in the pursuit of their studies. A fellowship grant, on the other hand, is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.

The amount of a scholarship or fellowship grant will also include the value of the contributed services and accommodations, the amount of tuition, matriculation and other fees, and any amount received in the nature of a family allowance. All of these items are meant to benefit the student in their pursuit of a specific field of study.

Is it Tax Free?

Before you can determine your tax liability, it is important to make sure that the assistance does not fall within the realm of being tax free. Here are the requirements for assistance to be considered tax free for the student taxpayer’s purposes. Keep in mind that a student needs to prove they are a candidate for a degree at what has been determined to be an eligible educational institution.

The fellowship grant or scholarship is tax free if it can meet the following criteria:

• It does not exceed your qualified education expenses
• It isn’t designated or earmarked for other purposes (such as room and board)
• It does not require by its terms that it can’t be used for qualified education expenses
• It does not represent payment for teaching, research or other services required as a condition for receiving the scholarship.

So who counts as a candidate for a degree? They must be in college pursing a degree and the institution is accredited and provides an acceptable degree program.

Additionally, the funds received must be used for qualified expenses. A few of these include:

• Tuition and fees required to enroll or attend an eligible educational institution
• Course related expenses, including fees, books, supplies, and equipment that are required for their courses at the eligible educational institution

Expenses that do not qualify typically include such things as room and board, travel, research, clerical help and equipment that isn’t required for enrollment in or attendance at an eligible educational institution. As a result, you can exclude from your gross income any part of the grant or fellowship used for the qualified expenses, but must include in your income the part that was used for unqualified expenses.

Keep in mind that if you are paid for services such as teaching through a grant or fellowship, those funds must be reported as part of your gross income. However, if you did the teaching with the National Health Service Corps Scholarship Program or The Armed Forces Health Professions Scholarship and Financial Assistance Program then you do not have to treat the funds received as a payment for services.

Reporting Requirements

If your grant or fellowship is tax-free and you did not have any other income to report, then you would not have to file a tax return. On the other hand, if a portion of the grant or fellowship can be deemed taxable, then you will need to file a return to report it and determine your tax liability. This income must be reported even if you did not receive a traditional W-2.

Types of Educational Assistance

Here are a few options for educational assistance, but each of these has their own requirements for eligibility.

• Fulbright Grant – a portion may be tax free based on above expenses and criteria
• Pell Grants and Need-Based Educational Grants – Tax free as long as they are used for qualified educational expenses
• Payment to Service Academy Cadets – Taxable income, will be reported to the taxpayer with a W-2
• Veterans’ Benefits – Tax free if received for education, training or subsistence

As you can see, there are many opportunities to receive educational assistance that is tax-free to pursue your education and training.

Click on the link below to contact a tax professional or accountant at HCS, LLC in North Richland Hills, TX, to discuss whether or not your grant or fellowship is part of your taxable income.