Do you have to pay tax on scholarships that include room and board?

It was asked, in the comments, whether a student receiving free room and board from Brown University has to pay taxes on it. The answer is yes, but with a possible loophole.

§ 117(a) of the Internal Revenue Code excludes from gross income “qualified scholarships,” and § 117(d)(1) excludes “qualified tuition reductions.” Only amounts used for “qualified tuition and related expenses” can be excluded. § 117(b)(2) defines the term “qualified tuition and related expenses”:

(A) tuition and fees required for the enrollment or attendance of a student at an educational organization described in section 170(b)(1)(A)(ii), and

(B) fees, books, supplies, and equipment required for courses of instruction at such an educational organization.

You don’t have to pay tax on free tuition, or anything else that’s “required” for courses of instruction, but you do have to pay tax on financial aid that covers other expenses.

Note the importance of the word “required.” If a university requires all students to own a notebook computer, then a free notebook computer would be excluded from income. But if the computer is merely suggested, and the university gives you a free computer, you would have to pay tax on the value of the computer. See Proposed Regulation § 1.117-6(c)(6) Example (1). This explains why many universities have instituted policies requiring every student to have a computer.

If the text of the statute doesn’t make it clear enough that room and board is not an allowable “related expense,” Proposed Regulation § 1.117-6(c)(2) states:

In order to be treated as related expenses under this section, the fees, books, supplies, and equipment must be required of all students in the particular course of instruction. Incidental expenses are not considered related expenses. Incidental expenses include expenses incurred for room and board, travel, research, clerical help, and equipment and other expenses that are not required for either enrollment or attendance at an educational organization, or in a course of instruction at such educational organization.

But, what happens if a college “requires” that all students live in campus housing and be on the campus meal plan, thus making the “fees” for these items “required for enrollment”? Is this a way around the tax problem?

I believe that if Brown University requires all students to live in campus housing and be on the meal plan in order to attend, then grants for such expenses magically become excluded from taxable income under § 117(a).

Comments

[superdestroyer]

From
http://www.brown.edu/Administration/Admission/studentlife/housinganddining.html

All students are required to live on-campus for their first six semesters, with the exception of Resumed Undergraduate Education students.

It also looks like freshmen have to take at least a seven meal plan.

[Half Sigma]

Yep, I guess Brown has lawyers.

[The Engineer]

One of my proudest income tax cheating moments (and there are many, every year in fact) was when I didn't claim my wife's graduate school stipend as income.

Okay, it wasn't a lot of tax money at stake, but she didn't have to pay FICA either. And it made a big difference in our lifestyle way back when.

Stickin it to da man.

Funny thing is, the level of cheating has escalated such that I almost "saved" more in taxes this year than that entire stipend!

You just have to love "Tax Cut". Best software ever.

[assetmgmt]

The unintended consequence of all this "requiring" in order to spare the aid recipients from paying taxes is that *middle-class students* who are paying their own way are being forced to pay for things they might otherwise have economized on -- like living off-campus with a relative, or in cheaper accommodations, etc. But then, liberals are all about failing to see unintended consequences, so why should anyone be surprised.

[Half Sigma]

The unintended consequence of all this "requiring" in order to spare the aid recipients from paying taxes is that *middle-class students* who are paying their own way are being forced to pay for things they might otherwise have economized on -- like living off-campus with a relative, or in cheaper accommodations, etc.

That's the deadweight loss caused by tax code complexity.