How to Report Scholarship and Fellowship Grants Not on a W-2

Scholarship and fellowship grants are financial aid awarded to students for their education, often for study or research. While many of these grants are tax-free, certain conditions can make a portion of the funds taxable income. When this income is not reported on a Form W-2, you must determine which part of the grant is taxable and follow the proper procedure to report it to the IRS.

Determining the Taxable Portion of Your Grant

The taxability of a scholarship or fellowship hinges on how the funds are used. For the funds to be tax-free, they must be used for “qualified education expenses.” This rule applies to individuals who are candidates for a degree at an eligible educational institution. The calculation is a straightforward formula: subtract your total qualified education expenses from the total grant amount you received. The result, if greater than zero, is the portion of the grant that is considered taxable income.

Qualified education expenses are defined by the IRS as tuition and fees required for enrollment or attendance. They also cover costs for books, supplies, and equipment that are required for your courses. For an item to be considered required, it must be a mandatory purchase for a specific class. For example, if a course syllabus explicitly states that particular software is necessary to complete the coursework, its cost is a qualified expense.

Conversely, many common student expenses are explicitly excluded from this category. These non-qualified expenses include room and board, travel costs, and any equipment that is not specifically required for a course. For instance, purchasing a new laptop for convenience does not count as a qualified expense unless it was a stated requirement for enrollment. Any funds received as payment for services like teaching or research, required as a condition of the grant, are also taxable income.

A student who receives a $15,000 fellowship grant can illustrate this. The student’s tuition and mandatory fees for the year total $10,000. They also spent $1,000 on textbooks and lab supplies that were required for their courses. Their qualified education expenses would be $11,000, and the remaining $4,000 of the grant is considered taxable income that must be reported.

Information and Forms for Reporting

To report taxable scholarship income, you must gather documentation, including Form 1098-T, Tuition Statement, from your educational institution. This form reports financial information about your education expenses. Box 1 of Form 1098-T shows the total payments received by the institution for qualified tuition and related expenses during the calendar year. Box 5 reports the total of all scholarships or grants administered and processed by the institution.

The figures on Form 1098-T provide a starting point, but they may not tell the whole story. The amount in Box 5 might include all grant money you received, but the amount in Box 1 only reflects payments made for tuition and fees. It does not include other qualified expenses you may have paid for out-of-pocket, such as required books and supplies purchased from an off-campus bookstore.

Personal record-keeping is necessary. You must keep all receipts for any qualified expenses not reflected on your Form 1098-T, including for required textbooks, lab equipment, or specific software. These records are your proof to substantiate the total amount of qualified education expenses you claim. This is necessary to accurately calculate the taxable portion of your grant.

For example, if your Form 1098-T shows $12,000 in Box 5 (scholarships) and $10,000 in Box 1 (tuition paid), it might appear you have $2,000 in taxable income. However, if you have receipts showing you spent an additional $1,500 on required books and supplies, your actual taxable income is only $500. Your personal records are the only way to account for that difference and ensure you do not overpay tax.

How to Report Taxable Scholarship Income on Your Tax Return

Once you have calculated the taxable portion of your grant, you must report it on your federal income tax return. Since the income was not on a Form W-2, it is not entered directly on Form 1040 but is first reported on an accompanying schedule.

The correct place to report this income is on Schedule 1 (Form 1040), Additional Income and Adjustments to Income. This income should be included on the line for “Scholarship and fellowship grants not reported on Form W-2.” You should also write “SCH” and the amount on that line to clarify the source of the income for the IRS.

The total from Schedule 1, including your taxable scholarship income, then flows to your main Form 1040 and is included in your adjusted gross income (AGI). Simply adding the amount to wages or other lines can cause confusion and may lead to processing delays or notices from the IRS. If you use tax preparation software, you may need to navigate through the education expenses section to find the specific area for reporting this type of income.