J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

33.1 Scholarships and Grants

Scholarships and fellowships of a degree candidate are tax free to the extent that the grants pay for tuition and course-related fees, books, supplies, and equipment that are required for courses. Amounts for room, board, travel, and incidental expenses are taxable. If you are not a candidate for a degree (see the degree test below), your entire grant is taxable.

Generally, you must pay tax on grants or tuition reductions that pay for teaching, research, or other services required as a condition of receiving the grant. This is true even if all degree candidates are required to perform the services. Thus, if you are a graduate student and receive a stipend for teaching, those payments are taxable, subject to withholding, and reported by the school on Form W-2. Similarly, no tax-free exclusion is allowed for federal grants where the recipient agrees to do future work with the federal government. However, a grant or tuition reduction that represents payment for teaching, research, or other services is not taxable if it is paid under the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.

Degree test.

Scholarships given to students attending a primary or secondary school, or to those pursuing a degree at a college or university, meet the degree test. Also qualifying are full-time or part-time scholarships for study at an educational institution that (1) provides an educational ...