The question whether scholarship or fellowship taxable under US Code 26 is quite common among student community. Before we find out the answer to this question, an important distinction between -fellowship & scholarship -must be made clear.Fellowship grants can be issued to non-students, whereas scholarships only go to students.
Definition of scholarship & fellowship for tax purposes
IRS Publication 970 is the definitive publication on the taxation of fellowship and scholarship income. It defines scholarship and fellowship as under :
A scholarship is generally an amount paid or allowed to, or for the benefit of, a student (whether an undergraduate or a graduate) at an educational institution to aid in the pursuit of his or her studies.
A fellowship grant is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.
When is fellowships and scholarships tax-free?
Here are the circumstances under which scholarship or fellowship can be claimed as exempt income and therefore excluded from gross income
- A scholarship or fellowship grant is tax free if granted to a student pursuing degree at an eligible educational institution. So , anyone who is not a student of degree course and getting a fellowship grant can not claim their fellowship as tax-free income.
- A scholarship or fellowship grant is tax free only to the extent of qualified education expense.
- Fellowship and scholarship income that goes towards paying your qualified education expenses like tuition and fees can be made tax-free, but fellowship and scholarship income that goes towards paying other kinds of expenses like your living expenses can’t be made tax-free.
What is eligible educational institution ?
An eligible educational institution can be a college, university, vocational school or other institution. The school must be eligible to participate in the Department of Education’s student aid programs. (View the full list of eligible institutions.)
How to know qualified education expense?
The best document to consult to know the qualified education expense is Form 1098-T, which is a tuition statement sent -to you and IRS- by your college or university.The 1098-T tax form will show you the amount you paid for qualified education expenses (in Box 1). Read faqs on Form1098-T
How do I report taxable scholarship income?
Any portion of a scholarship or a fellowship grant, or other grant that is not tax free must be included in your gross income .Also note that the taxable part of the Scholarship or fellowship grants are considered wages and must be reported on Form W-2 . ON your tax return , you should report as under :
- While filing Form 1040 , show taxable portion in the “Wages, salaries, tips” line of 1040 . If the taxable amount wasn’t reported on Form W-2, enter “SCH” along with the taxable amount in the space to the left of the “Wages, salaries, tips” line.
- If filing Form 1040NR (PDF) or Form 1040NR-EZ (PDF), report the taxable amount on the “Scholarship and fellowship grants” line.
Do you need to pay estimated tax ?
Yes , you may have to make estimated tax payments on the taxable part of the scholarship or fellowship .Please read Estimated Tax :Who ,When & How to Pay ? IRS rule desires quarterly estimated tax payments – i.e manual tax payments our times per year . In general, you should pay income tax in the year you receive your taxable fellowship or scholarship unless:
- Your income is particularly low (e.g., you had an income for only part of the year or your fellowship went toward qualified education expenses instead of your personal living expenses) or
- Your tax deductions and credits are particularly high.
Please also know what is tax-credit scholarship?