Taxation of Scholarships & Fellowships:
The Tax Reform Act of 1986 contained provisions regarding the federal income tax treatment of scholarships and fellowships. If you receive a scholarship or fellowship grant from the University or from any other source, you should be aware of the following:
- Under Federal tax law, only “qualified” scholarships or fellowships may be excluded from the recipient’s gross income.
- “Qualified” scholarships or fellowships are amounts given to degree candidates which are specifically applied towards tuition and required fees, books, supplies and equipment which are mandated for enrollment in the course. Any portion of a scholarship or fellowship applied towards expenses other than tuition and required expenses (e.g. room and board, meal plans, health insurance, parking passes, gym memberships, etc.) is considered taxable and should be included in the recipient’s gross income.
- An individual who is not a candidate for a degree must include in gross income any amount received as a scholarship or fellowship grant.
- A scholarship or fellowship which is conditioned upon past, present or future services provided by the recipient is not a qualified scholarship or fellowship and may not be excluded from the recipient’s gross income.
- Scholarships and Fellowships administered by UConn for enrolled students will be reported in Box 5 of Form 1098-T for those students who are eligible to receive Form 1098-T.
For U.S. citizens and resident aliens, the University is not required to report the taxable amount of scholarships or fellowships to the Internal Revenue Service; reporting such income for tax purposes is the sole responsibility of the recipient. However, as stated above, the amount of scholarships and fellowships administered by the University will be reported in Box 5 of Form 1098-T if the student is eligible to receive such form.
For nonresident aliens (“NRA”) (i.e. individuals who are not U.S. tax residents), scholarships and fellowships may be subject to federal income tax withholding if the amount is not directly applied towards qualified tuition and required fees. Again, if the recipient has the flexibility to use the award for expenses other than qualified tuition and required fees, then the award is subject to federal income tax withholding. The withholding rate for nonresident aliens who receive unqualified scholarships and fellowships is determined based on the student’s visa type, degree status and whether the U.S. has an income tax treaty with the student’s country of tax residency. In most instances, the withholding rate is 0% if there is a tax treaty available. Otherwise, the withholding rate is typically 14% on the taxable portion of scholarships and fellowship awarded to individuals with F, J, or M visas. The taxable portion for students not seeking a degree is the total amount of the scholarship or fellowship.
IRS tax regulations require that the taxable scholarships and fellowship awarded to nonresident aliens be reported to the IRS and to the recipient after each calendar year on Form 1042S – Foreign Person’s U.S. Source Income Subject to Withholding. Form 1042S reports the taxable scholarship/fellowship payments received, any income tax withheld, and treaty benefits claimed. That form is mailed to the recipient on or before March 15th following the close of the calendar tax year.
Please also visit our frequently asked questions to see answers to common questions asked by students with respect to scholarships and fellowships.
The IRS requires the University to issue Form 1098-T, Tuition Payments Statement, to each eligible student by Jan. 31 following the close of the calendar tax year. The form is provided in electronic format and can be downloaded, viewed or printed by logging into the Student Administration System. Form 1098-T is an informational tax document which is intended to aid taxpayers in determining whether they are eligible to claim an education tax credit on their federal income tax return. Form 1098-T is NOT to be filed with a tax return. Its purpose is not to report scholarship income to the IRS. It is for informational purposes only.
Form 1098-T is intended to assist you in completing IRS Form 8863 – Education Credits which is used for calculating the education tax credits that a taxpayer may claim as part of your personal income tax return. If you qualify for an educational credit, you should use your personal records and student fee bills, in addition, to Form 1098-T to determine your eligibility for an education tax credit. We strongly encourage you to refer to IRS Publication 970 to obtain an understanding of the education tax credits available and who is eligible to claim them.
For more information about Form 1098-T and answers to frequently asked questions please click here.
Prizes & Awards to Students:
Prizes & Awards Characterized as Scholarships:
The Department of Education considers payments or winnings because of enrollment at a postsecondary institution or for the purpose of aiding a student’s study, training, or research as scholarships or fellowships. These amounts are not taxable to the student to the extent they are used to pay tuition and required fees. Payments or winnings won in a contest are considered a scholarship, if any of the following conditions apply:
- The recipient is required to use the disbursement for educational purposes
- The recipient is eligible to receive the funding because he/she is a student
- The contest is related to the student’s university courses or degree completion
Per federal financial aid regulations, cash-based ‘prize’ scholarships (including gift cards) awarded to students are considered scholarships, and the value of these scholarships should run through the student’s fee bill.
Prizes & Awards Characterized as Other Income:
When the payment to a student does not meet any of the conditions mentioned above, the payment or winnings would be considered a prize and not a scholarship. The value of a prize is considered taxable income to the recipient and may require UConn to report the value of the prize to federal and state revenue agencies if the value of the prize is $600 or greater. Tax withholding is required when the prize is given to a nonresident alien for tax purposes but no income tax withholding is required if the prize is awarded to a U.S. citizen or resident alien.
Student Employee Wages – FICA payroll tax exemption:
Internal Revenue Code Section 3121(b)(10):
FICA (Social Security and Medicare) taxes do not apply to service performed by students employed by a school, college or university where the student is pursuing a course of study. Whether the organization is a school, college or university depends on the organization’s primary function. In addition, whether employees are students for this purpose requires examining the individual’s employment relationship with the employer to determine if employment or education is predominant in the relationship.