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:
- A scholarship is paid to or for the benefit of a student for the purposes of pursuing studies.
- 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.
Eek!!! What’s the statute of limitations? I had fellowships all the way through graduate school in 1964-67. They paid my tuition as well as a princely sum ($2,700 a year) to support myself.
I don’t recall ever filing an income tax return in those days.
Seriously, what IS the statute of limitations? Am I off the hook yet?
JBruce, I don’t know for sure about the 1960s, but I do know that the law about taxable scholarships and fellowships changed a few decades ago, so it is quite possible that you were actually in compliance with the applicable law at the time.
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!
JBruce, I have what looks like a reliable source of good news for you, a piece of legal scholarship which accords with my own memory.
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!