Scholarships, Fellowship Grants, Grants, and Tuition Reductions

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March 28, 2022
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Scholarships, Fellowship Grants, Grants, and Tuition Reductions

Your employer’s program has to be an educational assistance program as defined by the IRS. Your employer will have to tell you if their program is qualified or not. If you qualify through your employer’s program, you only have to ensure you spend the money according to the eligibility rules.

What Qualifies

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Educational assistance benefits are defined as additional info payments made for tuition, fees and other similar expenses, supplies, equipment and books. A person qualifies for $5,250 of these benefits tax free. Any additional amounts will be taxable. These benefits qualify as tax free if your education or training furthers your capabilities. The education does not have to be work-related or part of a program that results in a degree. Benefits paid for expenses for related meals, lodging, transportation or the cost of supplies you keep after the course is complete are considered taxable.

Benefits are not tax free if used for classes involving sports, games, or hobbies unless they are directly related to your employer’s business or they are required as part of a degree program. You cannot claim other tax credits or deductions with any expenses paid with money you received tax free from this benefit.

How This Applies to My Taxes

You do not apply this deduction from wages yourself. Instead, your employer will not report up to $5,250 in eligible expenses on your W-2 as wages. For instance, if you earned $50,000 in wages and had $5,000 in eligible education expenses paid by your employer, your W-2 would report not report $55,000 in wages even though the payments you received from your employer throughout the year totaled $55,000. Instead, your W-2 will only reflect $50,000 in wages. Any expenses above $5,250 will be reported as wage income on your W-2 unless it is considered a working condition fringe benefit.

Students may be eligible to exclude income from scholarships, fellowship grants, grants and tuition reductions if they meet certain eligibility requirements.

Who Is Eligible

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The student must be a degree-seeking candidate at an eligible educational institution. There are no income limits for these reductions of income and only the person receiving the benefit qualifies for the reduction in income.

What Qualifies

  • The amount received is less than or equal to your qualified education expenses, and
  • It is not designated for non-qualified expenses such as room and board, and
  • It is not a form of payment for teaching, research or other services that must be performed to obtain a scholarship or grant.
  • Room and board
  • Travel
  • Research
  • Clerical help
  • Equipment or other expenses not required to attend an eligible educational institution

Tuition reductions may be tax free. For education under the graduate level, including primary, secondary, high school and undergraduate students, you must meet one of the following relationships with the institution providing the benefit to qualify for tax free status. You must fit one of the following four classifications:

  • Employee of the eligible educational institution providing the benefit.

For graduate students, tuition reductions are tax free if it is provided by an eligible educational institution and you perform teaching or research activities for the institution for which you are a graduate student.

How This Applies to My Taxes

You will not report the income from qualifying scholarships, fellowship grants, and grants on your tax return. To figure how much you should not include in your income for the tax year, use Worksheet 1-1 (Taxable Scholarship and Fellowship Grant Income). For tuition reductions, read the Qualified Tuition Reduction section in Chapter 1 of IRS Publication 970 to figure how much you should exclude in your income.

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