Solved

What is the tax rule for Scholarship for Service?

Forum|Forum|4 years ago
May 7, 2021
1 reply
0 views

If a college students gets the scholarship for service from an organization, that means he got scholarship now, but have to work for the same amount of years for the agency after he graduate. Which part is qualified for tax free? For the part he has to pay tax, what if he changes his mind and return the money to the organization when he graduates, how can he get the paid tax back?

Best answer by AmyC

None of it is tax free, if your situation matches Example 2 below. If the money ends up being repaid, there is an IRC 1341 for repayment of income received. This tax return will need to be kept as it may become the basis for the credit of the future tax return. See page 36 About Publication 525, Taxable and Nontaxable Income

IRS Pub 970 states:

Payment for services.

Generally, you can't exclude from your gross income the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services required as a condition for receiving the scholarship. This applies even if all candidates for a degree must perform the services to receive the degree. However, see Exceptions next.

Exceptions.

You don't have to treat as payment for services the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services if you receive the amount under:

The National Health Service Corps Scholarship Program,
The Armed Forces Health Professions Scholarship and Financial Assistance Program, or
A comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college (as defined in that section).

Example 1.

You received a scholarship of $2,500. The scholarship wasn't received under any of the exceptions mentioned above. As a condition for receiving the scholarship, you must serve as a part-time teaching assistant. Of the $2,500 scholarship, $1,000 represents payment for teaching. The provider of your scholarship gives you a Form W-2 showing $1,000 as income. Your qualified education expenses were at least $1,500. Assuming that all other conditions are met, the most you can exclude from your gross income is $1,500. The $1,000 you received for teaching must be included in your gross income.

Example 2.

You are a candidate for a degree at a medical school. You receive a scholarship (not under any of the exceptions mentioned above) for your medical education and training. The terms of your scholarship require you to perform future services. A substantial penalty applies if you don't comply. The entire amount of your grant is taxable as payment for services in the year it is received.

AmyCAnswer

Employee

None of it is tax free, if your situation matches Example 2 below. If the money ends up being repaid, there is an IRC 1341 for repayment of income received. This tax return will need to be kept as it may become the basis for the credit of the future tax return. See page 36 About Publication 525, Taxable and Nontaxable Income

IRS Pub 970 states:

Payment for services.

Generally, you can't exclude from your gross income the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services required as a condition for receiving the scholarship. This applies even if all candidates for a degree must perform the services to receive the degree. However, see Exceptions next.

Exceptions.

You don't have to treat as payment for services the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services if you receive the amount under:

The National Health Service Corps Scholarship Program,
The Armed Forces Health Professions Scholarship and Financial Assistance Program, or
A comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college (as defined in that section).

Example 1.

You received a scholarship of $2,500. The scholarship wasn't received under any of the exceptions mentioned above. As a condition for receiving the scholarship, you must serve as a part-time teaching assistant. Of the $2,500 scholarship, $1,000 represents payment for teaching. The provider of your scholarship gives you a Form W-2 showing $1,000 as income. Your qualified education expenses were at least $1,500. Assuming that all other conditions are met, the most you can exclude from your gross income is $1,500. The $1,000 you received for teaching must be included in your gross income.

Example 2.

You are a candidate for a degree at a medical school. You receive a scholarship (not under any of the exceptions mentioned above) for your medical education and training. The terms of your scholarship require you to perform future services. A substantial penalty applies if you don't comply. The entire amount of your grant is taxable as payment for services in the year it is received.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

5

5BeverlyAuthor

Thank you very much for your help. I misunderstood the the nature of the scholarship. My son double checked with the school. It is actually loan for services agreement based on the government document. But if he works for the government for the amount of years he singed up for, the loan will be forgiven, otherwise, he has to repay back as a loan. Does that change the TAX situation?