Skip to main content

Taxability of Scholarship Awards

Question:

A church funds a yearly scholarship for a needy student. Will payment of the funds directly to the college help avoid taxation to the student?

Answer:

Any scholarship funds, whether paid to the student or directly to the college, generally are not taxable, as long as they do not represent disguised compensation. For example, a scholarship awarded to an "unpaid intern" in lieu of cash compensation will not be tax-free.

IRS Publication 525: "A candidate for a degree can exclude amounts received as a qualified scholarship or fellowship. A qualified scholarship or fellowship is any amount you receive that is for tuition and fees required to enroll at or attend an eligible educational institution, or
course-related expenses, such as fees, books, and equipment that are required for courses at the eligible educational institution. These items must be required of all students in your course of instruction. Amounts used for room and board do not qualify for the exclusion."

Scholarship funds will, however, reduce the amount of qualified education expenses that can be used to calculate education-related tax benefits. Essentially, the more scholarship funds that the student takes advantage of, the less his or her benefit for education-related expenses will be. 

Additionally, if total scholarships exceed qualified education expenses, the excess can be taxable as income. IRS Publication 570 provides additional guidelines regarding taxation of scholarship funds: "A scholarship or fellowship is tax free only to the extent:
  • It does not exceed your expenses
  • It is not designated or earmarked for other purposes (such as room and board)
  • It does not represent payment for teaching, research, or other services required as a condition for receiving the scholarship"

Comments

Popular posts from this blog

Qualified Small Employer HRAs

On December 13, 2016, President Obama signed the 21st Century Cures Act, allowing qualified small employers to offer Health Reimbursement Arrangements (HRA) that follow certain terms.

After the Affordable Care Act was passed, the IRS originally determined that an HRA was not a qualified group health plan. The Cures Act overrules this decision. HRAs are again an option for qualifying small employers.

To be eligible, the small employer must have fewer than 50 employees and must not offer a group health plan to any of its employees.

The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) must be subject to the following terms.
No salary reduction contributions may be made (i.e., 100% employer-funded).Employer must receive proof of employee’s minimum essential coverage.Reimbursements must be for qualifying medical expenses.Reimbursements for any year cannot exceed $4,950 (or $10,000 for family coverage), which will be adjusted annually for inflation.Employer must offer the …

Gifts Paid Out of Church Funds: Form 1099-MISC Requirements

Question:
 A church gave a wedding gift of $1000 to a couple who are church members. No goods or services were provided by the couple in exchange for the gift.  Is a Form 1099-MISC required? 
Answer: In the following answer, we assume that the couple are not employees of the church from whom the gift could not be viewed as compensation for their services. Also, the amount seems to be small enough to avoid any concerns of "private inurement."

Accordingly, no Form 1099-MISC is required. According to the 2017 IRS Instructions for Form 1099-MISC a Form 1099-MISC is only required for payment of goods or services. The requirements are as follows:
"File Form 1099-MISC, Miscellaneous Income, for each person to whom you have paid during the year:  At least $10 in royalties (see the instructions for box 2) or broker payments in lieu of dividends or tax-exempt interest (see the instructions for box 8);  At least $600 in:  1. Rents (box 1);  2. Services performed by someone who is not your …

Revised Form I-9 Released

The U.S. Citizenship and Immigration Services released a revised Form I-9. All new hires after January 21, 2017, must complete the revised Form I-9. All prior released versions of Form I-9 will be invalid for new hires.

Employers are required to have a completed hard copy of Form I-9 on file for each employee. Current employees do not need to re-complete the revised form.

More information on Form I-9 can be found on the USCIS website.