I thought–but wasn’t entirely sure–that the relevant law on scholarships and fellowships changed with the Reagan tax reforms enacted in 1986.

According to this document, I was right:

http://counsel.cua.edu/fedlaw//Harding.doc

To summarize the relevant contents:

Before 1986, graduate fellowships (with no strings attached–i.e., no teaching or research duties) for tuition and/or living expenses (room, board, travel, etc.) were not taxable.

Since 1986, the part of no-strings fellowships that go for tuition remains non-taxable, but the stipend for living expenses is taxable.

Hope this helps you sleep better at night!

Maybe the Wandering Tax Pro could provide some insight on that point, since he has so many years of tax prep experience. He said he started preparing taxes in the early 1970s.

I do know (for sure!) that if you had won a Nobel Prize in the 196o’s, it would not have been taxable income! But, nowadays, an American who wins a Nobel prize will have taxable income. I believe that some other countries still don’t tax Nobel Prizes, but the US does.

Also, although it’s a good idea to check with your financial aid office about the taxability of scholarship and fellowship income, I can tell you that a lot of the ones I’ve dealt with have been clueless about many important points of applicable tax law, so it’s a really good idea to check with an actual tax pro.

In particular, I’d be interested in an opinion from Kelly and the TWTP about this page from Princeton’s financial aid for grad students website:
http://gradschool.princeton.edu/about/docs/financial/taxrequirement.pdf

Princeton’s page claims that fellowship income is only taxable by federal tax authorities, and NOT by state tax authorities.

I seriously doubt that Princeton’s financial aid office knows all the applicable state tax laws in every state where a grad student might reside. For example, I know some Princeton grad students who commute from Philly and others who commute from NYC. I think checking with a local tax pro like Kelly or TWTP would be a very good idea before blithely deciding that Princeton’s info means they don’t have to report and pay state tax on their fellowship!