There inevitably comes an awkward moment when I’m delivering a guest lecture at Temple Law School when I can see flashes of panic on the faces of my students: You mean, I have to pay tax on my fellowship?
The taxation of scholarships and fellowships can be confusing. First, the general difference between the two:
1, A scholarship is paid to or for the benefit of a student for the purposes of pursuing studies.
2, A fellowship is paid for the benefit of an individual to aid in the pursuit of study or research. Fellowships are generally, though not always, directed towards a specific course of study (i.e. biology) rather than general studies.
Scholarships and fellowships may be federal income tax free – but you have to meet certain criteria. You must be a candidate for a degree at an eligible educational institution and you must use the scholarship or fellowship to pay qualified education expenses.
Qualified education expenses for purposes of scholarships and fellowships include tuition and fees for enrollment and required course-related expenses, such as fees, books, supplies and equipment. Room and board, travel, research and clerical help are not considered qualified education expenses and scholarships and fellowships used to pay these expenses are taxable.
Additionally, if any part of the scholarship or fellowship is tied to the performance of services (such as teaching or research) either during the school year or in the future, that part is taxable. This is true even if the services are required for the degree (some exceptions exist).
A scholarship doesn’t have to be purely academic; the same rules apply for athletic scholarships.
The rules for scholarships and fellowships can be complicated. If you have questions about your specific situation, pay a little visit to the friendly folks at your financial aid office. They should be able to point you in the right direction.
As talk of recession increases, I’m hearing more and more folks question the merits of higher education. I have to say, I completely understand where they are coming from…
While it’s true that many jobs require a college education – or beyond (like law) – increasingly, you can find a decent job without a college education. This is especially common in the tech industry where some knowledge in java or html can take you a lot further than biology.
Let me be clear: I believe in education. I am thankful to have been the first person in my family to graduate from college. I am especially proud to be the only person in my family – extended or otherwise – to graduate from law school. But education in the United States is expensive. Very expensive.
That’s why it was especially galling to witness an update on CNN the other day about how the credit crunch was hitting student loans. With the average cost of attending a public university reaching $16,000 per year and the average cost of attending a private university reaching $33,000 per year, that places a real burden on American families. The expert’s answer? Try to get a grant or scholarship. Apparently, it’s just that easy.
As a good student who relied upon scholarships, grants and yes, a whole lot of loans, it’s interesting to me how many folks just don’t “get” how very expensive it can be to attend college and graduate school – just like that expert who thought that a grant or two would make all of the difference. In fact, many of the folks who point fingers at lawyers like me and whisper about how rich we must be, clearly don’t understand the struggles of paying down hundreds of thousands of dollars worth of college and grad school loans. And our tax code? It allows just a tiny little bit of a deduction for the mountains of interest on these loans – far less than the other investment in young taxpayers’ lives: their homes.
So is it worth it to go to college and law school? I have some thoughts about that for another post…
Taxpayer asks:
My daughter is in her second semester in Troy University. She has never had an income so we are paying everything from tuition, books, clothes, her apartment, providing a car, cell phone, gas etc. I know that I can deduct the tuition, what about the living expenses?
Thanks for any info you can give me.
Taxgirl says:
First of all, if your daughter is reading (or even if she’s not), she needs to give you a great big smooch and say thank you. It sounds like you are going above and beyond – an apartment? a car? a cell phone? Can you adopt me?
All of that said, you cannot deduct living expenses on your federal income tax return. It’s considered the cost of, well, living.
All is not lost, however. You may still be able to deduct medical expenses, some school fees and claim your daughter as a dependent if you are supporting her. See my post about child-related tax breaks for more information.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl!
Remember that Staples ad where the parent runs down the aisle tossing school supplies into the cart while “It’s the Most Wonderful Time of the Year” plays in the background. That’s how I feel about this time of year.
As the parent of three children, I love back to school. I crave the sense of normalcy and order that it brings to my house. Summer to me, is chaos. Just hot, sticky chaos. But back to school? There’s a schedule. Every day, there is a sense of purpose. My oldest daughter scrambles out of bed in the morning with a plan: get dressed, pick up the backpack and head out to school. And this year, my youngest daughter who very matter of factly accused me of keeping her out of school on purpose is starting preschool a few days per week. There are school events: picture day, picnics and dinners. It is a thrilling season.
Until the tuition bill comes.
As I might have mentioned once or twice before, I live in Philadelphia (get used to more references – football season is starting, the Eagles are playing and I have Donovan McNabb in my fantasy football league). For reasons that are more complicated than a blog post or two can cover, I choose to send my children to private school rather than public school. This is not an easy thing for us to do financially, and it will become more difficult as my children get older. It is, as I’ve posted about before, part of the difficulty of being middle class in America.
And each time I try to sort out whether this is the right thing to do, I realize that, as a nation, I still can’t figure out our priorities. The feds don’t give you any kind of break for private school tuition: if you pay for private or parochial school, no deduction. Yet, since I can keep my child out of school in the state of Pennsylvania until the age of 8 (!), if I paid for private childcare at home instead of school, that would be deductible. Oh yeah, you read that right: it’s better from a tax perspective to keep my child home for years and pay for childcare than to send her to private school. Is that smart tax policy?
And if I buy a more expensive home in a different school district, the interest from the mortgage interest is deductible. And how much “extra” home could I buy? The interest equivalent of tuition for my three children is about $450,000. Put another way, inflating the amount that I am willing to spend on my home by $450,000 results in additional annual mortgage interest equal to the cost of tuition for my children – and it’s deductible. How deductible? I can deduct the interest of a home worth up to a million dollars – a million. So instead of investing in education, I should invest in real estate according to current tax policy. Kind of makes you understand how we got into this sub-prime fiasco, huh?
Don’t get me wrong. I love my daughter’s school (I’d better, I signed up to be class parent this year). I value education. I make sacrifices so that my children can go to a good school (you will not be seeing me in these Jimmy Choo shoes anytime soon). But I just have to wonder about the direction our country is headed when we’re willing to subsidize houses, cars and even washing machines through tax incentives – but not education.
Well, the feds do offer some tax incentives for college. I guess that’s something.
