Scholarships and fellowships are considered tax-free as long as two conditions are met:

First, (as obvious as this seems) you have to actually be enrolled at a university. Second, the scholarship or fellowship has to be used to pay for tuition or required books and supplies. Expenses due to room and board, traveling, or optional supplies don’t count (they’re considered incidental expenses, so they go towards calculating your adjusted gross income instead), and you have to report any payments you received for doing any kind of teaching or counseling that was required by your scholarship or fellowship (although there are some organizations that exempt you from this rule).

Students who receive scholarships or fellowships to do work in, say, a hospital setting may find the tax question a bit more fuzzy. If you’re ever unsure, just check with your sponsoring institution.

Tags: fellowships, scholarships, tax exemptions, taxes