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Are scholarships or grants considered taxable income?

by Lotus Li | May 2, 2025 | Income Reporting, Individual Taxes

Here’s what HIVE AI had to say about “Are scholarships or grants considered taxable income?”:

Scholarships and grants can be either taxable or non-taxable, depending on how they’re used and the conditions attached to them. Let me explain the tax treatment of these educational funds in detail.

Tax-Free Scholarships and Grants

Scholarships and grants are tax-free (excludable from gross income) when the following conditions are met:

Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii). IRC § 117(a)

To qualify for tax-free treatment, you must meet these specific requirements:

If you receive a scholarship, a fellowship grant, or other grant, all or part of the amounts you receive may be tax-free. Scholarships, fellowship grants, and other grants are tax-free if you meet the following conditions:

You’re a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and
The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses at the educational institution. IRS.gov Tax Topics

The scholarship isn’t taxable income if you satisfy all of the following conditions: You’re a candidate for a degree at an eligible educational institution. You use it to pay for: tuition and fees required for enrollment or attendance at the eligible educational institution, and course-related expenses, such as fees, books, supplies, and equipment required for courses of instruction at the eligible educational institution. IRS.gov FAQ

What Constitutes a “Qualified Scholarship”

The federal income tax treatment of qualified scholarships and fellowship grants is addressed in section 117 of the Code. Section 117(a) provides that gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii) (describing, generally, a school). Only “qualified scholarships” may be excluded from income. A qualified scholarship is defined as an amount expended for “qualified tuition and related expenses.” PLR-144205-12

Since amounts treated as a “qualified scholarship” are excluded from gross income under IRC 117(a), no withholding is required for qualified scholarships paid to a nonresident alien. The 14% tax rate applies to the taxable amounts incident to a qualified scholarship. A qualified scholarship includes the student’s tuition, fees, books, and related expenses, but not living expenses (i.e., room, board or travel). IRS IRM 4.10.21 U.S. Withholding Agent Examinations – Form 1042

Taxable Portions of Scholarships and Grants

Certain portions of scholarships and grants are taxable, even if they otherwise qualify as scholarships:

Section 117(c) of the Code, implementing changes made by the Tax Reform Act of 1986, Pub.L. No. 99-514, provides that the exclusion for qualified scholarships shall not apply to that portion of any amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship or fellowship. Regulations governing the includability of compensatory grants in income have been upheld by the Supreme Court of the United States, which has described excludable grants as “relatively disinterested, ‘no-strings’ educational grants, with no requirement of any substantial quid pro quo from the recipient.” PLR-144205-12

We note that petitioner’s treatment of the payment as income is consistent with the treatment of scholarships and fellowship grants under sec. 117(c), which provides that the portion of a scholarship or fellowship grant which represents compensation for teaching, research, or other services by the student that are required as a condition for receiving the scholarship or fellowship grant is not excludable from income. See sec. 1.117-4(c), Income Tax Regs. (providing that amounts paid as compensation for services or primarily for the benefit of the grantor are not considered amounts received as a scholarship or fellowship grant). Dawson U.S. Tax Court Opinions: Harris He Wang

The compensation portion of a scholarship or grant is generally reportable as wages. IRS IRM 4.10.21 U.S. Withholding Agent Examinations – Form 1042

The compensatory portion of a scholarship or grant is reportable as wage income. See § 1.6041-3(o). Tresuary Reg. 1.1441-1

Living Expenses

Scholarship or grant money used for living expenses is generally taxable:

The recipient of the scholarship is responsible for determining whether all or part of the scholarship is includible in gross income under section 117 of the Code. We understand that F will advise the recipient that amounts granted are taxable income, if the aggregate scholarship amounts received by the recipient exceed tuition and fees (not including room and board) required for enrollment or attendance at the educational institution and fees, books, supplies, and equipment required for courses of instruction. IRS Determination-0527022

Reporting Requirements

If you receive a scholarship or grant, you need to determine what portion (if any) is taxable:

Taxable Scholarships and Fellowship Grants If and to the extent your scholarship or fellowship grant doesn’t meet the requirements described earlier, it is taxable and must be included in gross income. You can use Worksheet 1-1 to figure the tax-free and taxable parts of your scholarship or fellowship grant. IRS – Publication 970: Tax Benefits for Education

Reporting Scholarships and Fellowship Grants Whether you must report your scholarship or fellowship grant depends on whether you must file a return and whether any part of your scholarship or fellowship grant is taxable. If your only income is a completely tax-free scholarship or fellowship grant, you don’t have to file a tax return and no reporting is necessary. If all or part of your scholarship or fellowship grant is taxable and you are required to file a tax return, report the taxable amount as explained below. You must report the taxable amount whether or not you received a Form W-2. IRS – Publication 970: Tax Benefits for Education

How you report taxable scholarship or grant income depends on which tax form you file:

How To Report How you report any taxable scholarship or fellowship grant income depends on which return you file. Form 1040 or 1040-SR. If you file Form 1040 or 1040-SR, include any taxable amount reported to you in box 1 of Form W-2 in the total on line 1a. Include any taxable amount not reported to you in box 1 of Form W-2 on Schedule 1 (Form 1040), line 8r. IRS – Publication 970: Tax Benefits for Education

Special Considerations for Non-Resident Aliens

Note that income from scholarship and fellowship grants is not subject to 1099 reporting or backup withholding. IRS IRM 4.10.21 U.S. Withholding Agent Examinations – Form 1042

In addition, the 14% tax rate applies to grants from a tax-exempt educational or charitable organization, an international organization, the government of a foreign country (or including the states), and an agency of the federal or a state or local government received by a nonresident alien present in the U.S. on an F, J, M, or Q visa even though the individual is not a candidate for a degree at an educational institution. Note that if the grant does not fall within the types described here, the general 30% withholding tax rate applies. IRS IRM 4.10.21 U.S. Withholding Agent Examinations – Form 1042

Making the Most of Your Scholarship or Grant

Your specific circumstances will determine what amount, if any, of scholarship or fellowship grant to include in income to maximize your tax refund or minimize the amount of tax you owe. Also, the scholarship or fellowship grant must be one that may (by its terms) be used for nonqualified expenses. Finally, the amount of the scholarship or fellowship grant that is applied to nonqualified expenses can’t exceed the amount of the student’s actual nonqualified expenses that are paid in the tax year. This amount may differ from the student’s living expenses estimated by the student’s school in figuring the official cost of attendance under student aid rules. The fact that the educational institution applies the scholarship or fellowship grant to qualified education expenses, such as tuition and related fees, doesn’t prevent the student from choosing to apply certain scholarships or fellowship grants to the student’s actual nonqualified expenses. By making this choice (that is, by including the part of the scholarship or fellowship grant applied to the student’s nonqualified expenses in income), the student may increase taxable income and may be required to file a tax return. IRS – Publication 970: Tax Benefits for Education

Conclusion

To summarize, scholarships and grants are tax-free when:

You’re a degree candidate at an eligible educational institution
The funds are used for qualified education expenses (tuition, fees, books, supplies, and equipment required for courses)

Scholarships and grants are taxable when:

They represent payment for teaching, research, or other services required as a condition for receiving the scholarship
They are used for non-qualified expenses such as room, board, or travel
They exceed your qualified education expenses

If you receive a scholarship or grant, you should carefully track how the funds are used to determine what portion (if any) needs to be reported as taxable income on your tax return.

Sources:

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