ent "Flounder" Dorfman is a full-time student at Faber College. He is a senior and a member of Delta Tau Chai fraternity. The Deltas awarded Kent a $35,000 scholarship called "The Dean Wormer Double Secret Probation Memorial Scholarship". Kent pays the following amounts, out of his scholarship, to attend Faber College: Tuition - $26,000; Required lab fees - $300; Required books and supplies - $1,000; Room and board - $7,500. Part 1 of 6: Does the $26,000 of the scholarship that was paid for tuition have to be included in Flounder's taxable income for federal income tax purposes?

Kent "Flounder" Dorfman

Scholarship from Delta Tau Chair Fraternity

The $26,000 will not be included in Flounder's taxable income for federal income tax purposes.  It is a qualified scholarship expense.  It is only the portion of $7,500 used for Room and board that is not a qualified scholarship expense.

Though it is required that the $35,000 be disclosed in form 1040.  Qualified expenses like tuition, required lab fee, required books and supplies are tax-exempt, while Room and board and other non-required expenses are not qualified and therefore taxable.

Explanation:

S117(b)(2) of the IRS Code states the expenses that are qualified and tax-exempt if they are tuition-related.

When a qualified student, usually above 18 years and enrolled in post-secondary educational institution, receives a scholarship, the amount she uses to pay for tuition and other required expenses, which are generally payable by other students, are regarded as qualified expenses.  Since they are qualified, they are also tax-exempt, meaning that taxes will not be paid on them, instead they will be deducted for tax purposes from the student's income.  In the case of Kent, the tuition fee is not included in her taxable income for federal income tax purposes.

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