With the cost of higher education sky-rocketing, it may make financial sense for students and families to consider grants and fellowships. But what about the tax consequences of receiving a grant or fellowship payment? Are grants and fellowship taxable?
The question depends upon whether the individual is a degree candidate. A degree candidate can exclude from taxation grants and fellowships that pay for tuition and course-related fees, books, supplies and equipment necessary for courses (candidates must first meet the degree test under IRS rules). Non-degree students, however, must report the entire amount of grants and fellowships as income received.
There are some limitations as well for degree candidates. Degree candidates may not exclude any portion of a grant and/or fellowship received for purposes not described above, including room, board or similar expenses. Additionally, in general, amounts received for grants or tuition reductions that pay for teaching, research or other services, required as a condition for receiving such amounts, may not be excluded from income. This will be the case even if all degree candidates in a particular program are required to perform such services.
Finally, federal grants received by a candidate in return for the individual performing future work with the federal government, generally may not be excluded (however, there may be limited, specific exceptions under certain programs).