Tax-Free Scholarships and Fellowships:
Degree Candidate Requirement: The recipient must be a candidate for a degree at an eligible educational institution.
Qualified Education Expenses: Funds must be used for tuition, fees, books, supplies, and equipment required for courses. Expenses such as room and board, travel, and optional equipment are not qualified.
No Service Requirement: The award should not require teaching, research, or other services as a condition for receiving the scholarship or fellowship. Exceptions exist for specific programs like the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship and Financial Assistance Program.
Taxable Scholarships and Fellowships:
Non-Qualified Expenses: Amounts used for expenses like room and board, travel, research, and optional equipment are taxable.
Payment for Services: If the award represents payment for teaching, research, or other services required as a condition for receiving the funds, it is taxable. Exceptions apply to certain programs as noted above.
For detailed information, refer to IRS Topic No. 421, which provides comprehensive guidance on the taxability of scholarships and fellowship grants.
Understanding these distinctions ensures compliance with tax regulations and helps in effective financial planning for educational pursuits.