Scholarships, Fellowships, and Grants, Oh My!

It can be a great feeling to get a scholarship or grant to help fund your education. A scholarship is typically an amount paid to a student for a specific institution for study. A fellowship grant is similar, except that the money paid can be used for the purpose of study or research. There are also different grants available based on need, such as a Pell Grant, and Fulbright Grants. Scholarships and grants may be partially or fully tax free depending on certain conditions.

You must meet the following two requirements for tax-free grants, fellowship grants, or scholarships:

  1. You are seeking a degree at a qualifying educational institution which has a normal enrollment or students in attendance and maintains a regular faculty and curriculum at the physical location of the activities.
  2. The amount you receive pays for tuition and enrollment fees, or is used to purchase books, supplies and equipment necessary for the required courses.

Additionally, you have to include the following in your gross income:

  • Amounts used to pay for incidentals, like lodging, travel, and other optional supplies.
  • Amounts received for services such as teaching, researching, or other activities as a stipulation of receiving the grant or scholarship. You do not need to include amounts received for services that are required by the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.

Typically, you will have to report portions of these awards that count toward gross income on your tax return. You can include the amounts necessary on your Form 1040A by entering SCH in the space to the left of “wages, salaries, and tips”. The 1040NR and 1040NR-EZ have a line specifically for scholarships and grants. Additionally money received for services in connection with the grant may generate a W-2. You can use this to file your tax return, as you include the amount listed on the W-2 in the “wages, salaries, and tips” section of your tax return. If you have a taxable amount, you may be required to make tax payments throughout the year.