If you receive a scholarship or fellowship, the amounts you receive may be tax free.
Generally, a scholarship or fellowship is tax free if:
To meet the first condition above, you must be a candidate for a degree at an educational institution that maintains a regular faculty and curriculum. The institution must also have a regularly enrolled body of students in attendance at the place where it carries on its educational activities.
To meet the second condition above, the amounts you receive must be used for:
Any amounts you use for room and board, travel, optional equipment, or other incidental expenses do not meet the second condition and must be included in taxable income. You must also include in income amounts received as payment for teaching, research, or other activities required as a condition for receiving the scholarship or fellowship.
You do not need to include any amounts received for services required by the National Health Service Corps Scholarship Program and Armed Forces Health Professions Scholarship and Financial Assistance Program.
To enter your scholarship or fellowship income in TaxAct®:
NOTE: If your Form 1098-T includes employer-provided amounts in Box 5, you should subtract the employer-provided portion from the amount you enter for Box 5 in TaxAct (step 5 above). This amount should be entered as employer-provided education benefits on the screen titled Student Information – Education Assistance (step 6 above).
For example, if the Form 1098-T you receive reports $10,000 in Box 5, but that amount includes $3,000 in employer-provided assistance, you would enter $7,000 as your Box 5 amount. The remaining $3,000 would then be entered as employer-provided benefits on the education assistance screen.
See IRS Publication 970 Tax Benefits for Education for more information. The informational chart below appears on page 4.