Tax Treatment of a Scholarship from an 501(c)(6) nonprofit organization

[asktaxquestion]

Hi,

I am a master student and I got a scholarship/achievement award in a check from a 501(c)(6) organization in 2022. My questions are below:

1. Should I be expecting a tax form from the organization before filing my 2022 tax return? If not, how to report it?

2. According to 26 USC Section 117, I believe the scholarship is tax free as long as I use it to pay for my tuition and books, and keep all my records of the payments. Is that correct?

3. I don't need to finish using up the scholarship fund in the year (2022) I received as long as I use it to pay for my tuition. Am I right?

Thank you in advance!

[Hal_Al]

Q. Should I be expecting a tax form from the organization before filing my 2022 tax return?

A. Not if it's a scholarship.  But, for a definitive answer, you'll have to ask them. Rather than issuing a check to you, it's better, for tax purposes, if the organization sends the money to the school, for your account.

Q.  If no tax form,  how to report it?

A. You don't report it on any IRS form, if it was used for qualified expenses ( tuition, fees and books).  In TurboTax (TT), you will be asked if you received any scholarships not shown on the 1098-T. Enter the amount and TT will match it to the expenses you enter.  After adjusting for any tuition credit you may claim, it will report the any taxable amount on line 1 of form 1040 with an SCH notation.

Q.   I believe the scholarship is tax free as long as I use it to pay for my tuition and books, and keep all my records of the payments. Is that correct?

A. Yes. Scholarships are tax-free  if:
   a. Funds are used for qualified education expenses,
   b. Student is a candidate for a degree,
   c. Student studies at an eligible educational institution, and
   d. Award is non-compensatory
      Otherwise, they are taxable – See IRS Publication 970

Q. I don't need to finish using up the scholarship fund in the year (2022) I received as long as I use it to pay for my tuition. Am I right?

A.  No.  If a check was issued to you in 2022, all the money, from that check, must be used for 2022 expenses.

[asktaxquestion]

Hi,

Thank you for the above response! I have a follow up question.

Q. I don't need to finish using up the scholarship fund in the year (2022) I received as long as I use it to pay for my tuition. Am I right?

A.  No.  If a check was issued to you in 2022, all the money, from that check, must be used for 2022 expenses.

If I use up the scholarship to pay for Fall 2022 and Spring 2023 tuition in 2022, is Spring 2023 considered 2022 expenses if it is a prepaid for an academic period that begins in the first three months of the next calendar year? Is there any IRS Publications I can refer to? Thank you!

[Hal_Al]

Q. If I use up the scholarship to pay for Fall 2022 and Spring 2023 tuition in 2022, is Spring 2023 considered 2022 expenses if it is a prepaid for an academic period that begins in the first three months of the next calendar year? 

A. Yes.

Q.  Is there any IRS Publications I can refer to?

A. IRS Publication 970.

[asktaxquestion]

Hi,

Thank you for the above response! I have an additional question.

I am afraid I made a mistake in my prior post. According to Pub970, "Prepaid expenses. Qualified education expenses paid in 2021 for an academic period that begins in the first 3 months of 2022 can be used in figuring an education credit for 2021 only."  This defines prepaid expense in order to claim education credits (American Opportunity Tax Credit) and Lifetime Learning Credit) rather than scholarship.

Hence, is there a requirement for prepaid expense related to scholarship? If yes, can you advise which part of Pub970 I can refer to?

[Hal_Al]

Q. Does the first  first 3 months of 2022 rule apply to scholarships, as well as ed credits?

A. It does not appear to be specifically covered in Pub 970.  But, I think you're safe in relying on the fact that  Pub 970 applies the 3 month rule to all other education related tax benefits. Your grant money was received in 2021 and spent on qualifying expenses in 2021, including expenses for the first 3 months of 2022.  Nowhere does Pub 970 say it doesn't apply.

[asktaxquestion]

Hi, 

Do I have to follow the 3 months rule? My school has Winter (Jan - Feb) and Spring (April - May). If I paid Winter 23’s and Spring 23’s tuition in 2022, are they qualified prepaid expenses for the scholarship? Or should I better off considering only Winter 23’s tuition is qualified? 

Thanks! 

[Hal_Al]

Q.  Do I have to follow the 3 months rule?

A.  Probably.  It's clear that the first 3 month rule applies for education credits etc.  So, it probably applies to scholarships too.  If the Spring term starts in March (even Mar 31), then yes the payment counts as qualified expense for 2022. 

Q. Or should I better off considering only Winter 23’s tuition is qualified? 

A.  You'll be better off counting the Spring 2023 payment in 2022, since that makes it tax free.  The real question is "are you allowed to do that". That's not clear. If the school actually bills you (for Spring 2023) in 2022 and you pay it, I think you're on firmer ground than if you just voluntarily pay it in 2022.