Considerations When Filing as a Student

Students pursuing their undergraduate or graduate education, even if not working during that period, may still have tax liability if they receive scholarships or reduced tuition. Thus, even the most intense students and biggest "lab rats" may have federal income tax liability.

Scholarships exclusion

Taxpayers generally may exclude a qualified scholarship from gross income for income tax purposes if the taxpayer is a degree candidate at a qualified educational organization. For the purposes of the qualified scholarship exclusion, a qualified educational organization is one that normally:

  1. Maintains a regular faculty and curriculum; and
  2. Has a regularly enrolled body of students in attendance at the place where its educational activities are regularly carried on.

Please note that if the scholarship does not meet the requirements for exclusion, the taxpayer must include the amount received in gross income.

Qualified Scholarship

For tax purposes, a qualified scholarship is an amount received by an individual as a scholarship or fellowship grant that the taxpayer establishes is used for qualified tuition and related expenses in accordance with the conditions of the grant. Qualified tuition and related expenses eligible for exclusion from gross income include payments to a qualified educational organization for:

  • Tuition and fees required for enrollment or attendance; and
  • Fees, books, supplies, and equipment required for courses of instruction.

Qualified Tuition Reduction

A taxpayer who receives a qualified tuition reduction may exclude the reduced amount from their gross income. However, a taxpayer must include in total income any part of a scholarship or tuition reduction that represents payment for past, present, or future teaching, research, or other services required as a condition for receiving the scholarship or tuition reduction.

With that said, if part of a scholarship or tuition reduction represents payment for services required as a condition for receiving the scholarship or tuition reduction and the other part otherwise qualifies for exclusion from gross income, a taxpayer can exclude the part that does not represent payment for services.

There is an exception. A taxpayer can exclude from gross income a qualified scholarship or tuition reduction received under the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program. A taxpayer can also exclude from the total income comprehensive student work/learning/service programs operated by a work college, even if part of the amount received represents payment for services required as a condition for receiving the scholarship.

Graduate Students and Tuition Reduction Exclusion

In general, an excludable tuition reduction must be for education below the graduate level. However, graduate students attending a qualified educational organization, at the graduate level, and performing teaching or research for such organization may exclude the graduate school tuition reductions from gross income.

Although students who are in undergraduate or graduate school may not have a job, they may still have certain tax liabilities on their federal income tax forms. Receiving a scholarship or tuition reduction does have a downside.

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