Scholarships and Fellowships

The tax treatment of financial support (whether it be called a scholarship, fellowship, grant, award, or stipend) varies based on the terms of the agreement, how the proceeds are used, the residency and immigration status of the recipient, and whether services are required to be performed. The reporting requirements and income tax consequences of scholarships may seem a bit confusing at first.  This is a unique area of tax law that is encountered only in an academic environment.  Some of the rules are different for U.S. citizens/residents and nonresident aliens.  And none of these rules apply if there is any service requirement. 

The Internal Revenue Service generally defines scholarships as amounts paid to, allowed to, or for the benefit of a student to aid in the pursuit of studies. It may also be in the form of a reduction in the amount owed by the recipient for tuition, room and board, or any other fee.

If there is any service component tied to the funding, the amounts are considered compensation, the recipients are treated as employees, and the payments are subject to withholding and reporting as wages. To be non-taxable, there must be no obligation required of the student other than remaining enrolled in a degree plan and maintain qualifying requirements of the award.

Scholarships

Scholarships are excludable from income (as provided in Section 117 of the Internal Revenue Code) if the following requirements are met: 

  • The recipient must be a candidate for degree at an eligible educational institution. Emory is an eligible educational institution.  The recipient does not necessarily have to be a candidate for a degree from Emory, but must be a candidate for a degree.
  • No teaching, research, or other services are required as a condition of receiving the scholarship.
  • The award must be a "qualified scholarship". These expenses include tuition and fees related to education that are required to enroll at or attend the educational institution. Also included are course related expenses such as fees books, supplies, and equipment that are required for the course and are required for all students enrolled in that course.  However, expenses for such items that are not required for the course even though they may be suggested as being helpful are not qualified education expenses. 

Payments that cover other expenses do not qualify as they are more personal in nature and are not directly related to the student's education, even if these amounts must be paid as a condition of enrollment.  These include expenses such as room, board, living allowances, travel, and health insurance.  These nonqualified scholarship amounts are taxable to the recipient.

U.S. Citizens, permanent residents and resident aliens

Emory's requirement for reporting these scholarships to the Internal Revenue Service for U.S. citizens, permanent residents and resident aliens (for tax purposes) is clearly defined.  IRS Notice 87-31 places sole responsibility for determining taxability on the recipient.

The college or university has no obligation to make this determination and, as such, no reporting to the IRS is required.  Notice 87-31 does recommend however that the educational institution advise students in writing that some or all of the financial support may be taxable and it is the student's responsibility to seek advice on potential income tax and filing requirements. The University is not required to withhold income tax on any scholarship payments to U.S. citizens, permanent residents, or resident aliens, and they are generally not reported to the IRS if paid via Student Financial Services (OPUS). However, the recipient must report the taxable portion of scholarships on his/her individual income tax return.

Nonresident aliens

Emory University is required to appropriately tax and report all scholarship payments to nonresident aliens that are not directly applied to tuition and fees.  Section 1441 of the Internal Revenue Code requires the payor to withhold or otherwise pay the appropriate tax on the income of nonresident aliens.

In most cases the tax rate applied to scholarships is 14%, but an income tax treaty may eliminate the tax for a fixed number of years.  To prevent hardship, Emory pays the tax on behalf of the students if the income is not eligible for treaty benefits.  This is accomplished by "grossing up" the taxable amounts and reporting the full amount to the Internal Revenue Service as if the tax had been withheld.  See NRA Definitions for more information on "grossing up" income.  See Nonresident Alien Tax Assistance for further information.

Fellowships

Fellowships are amounts paid for the benefit of an individual to pursue study, training, or research, and generally require services to be performed (either currently or in the future) as a condition of the award.

Payments are considered compensation for services if:

  • The amount represents compensation for past, present, or future employment services.
  • The activity being funded is subject to the direction or supervision of the University.
  • The payment enables the recipient to pursue studies or research primarily for the benefit of the University.

These recipients are deemed to be Emory employees and all procedures for employment must be followed. The payments are made via payroll, and are subject to OASDI and Medicare withholding, as well as Federal and Georgia income tax. Additional rules apply to nonresident aliens.  See Nonresident Alien Tax Assistance for further information.

National Institutes of Health

There is yet another type of award with its own exclusive requirements. Payments made to National Research Service Award (NRSA) fellows are not treated as compensation for services. The IRS has ruled that these stipends are part of a non-compensatory training grant. These awards may seem to fall under the scholarship rules, except the recipients are conducting research. Under the terms of the award administered by the National Institutes of Health, Emory is not required to report these payments on Form 1099 (different rules apply to nonresident alien fellows). No income tax withholding is required (again, different rules apply to nonresident alien fellows).

Remember

In most cases, non-service related scholarships are made via student accounts. Payments made through student accounts are reported on Form 1098-T (or Form 1042-S for Nonresident Aliens). Any payments made through the Payroll Department as non-reportable or made through Payment Services must have prior approval. Please note that payments made through the Payroll Department are reported on form 1099-MISC (or 1042-S for Nonresident Aliens).

Also, keep in mind that whatever terminology is used in describing the payment, the nature and substance of the financial support determine tax treatment:  Was the individual paid to study or paid to work?  Contact the Emory Tax Department if you need assistance with a particular payment.

For more information, IRS Publication 970, Tax Benefits for Education provides details as well as information on other tax incentives such as the Hope and Lifetime Learning Credits and the Student Loan Interest Deduction.