CPA Exam — REG (Regulation)Federal Taxation of IndividualsEasy
A client, single, age 32, received a $10,000 scholarship for tuition and fees and an additional $2,000 for room and board. They also worked part-time and earned $5,000 in wages. What amount of the scholarship is includible in their gross income?
- A$10,000
- B$2,000
- C$12,000
- D$0
Show answer & explanationAnswer & explanation
Correct answer: B. $2,000
Scholarships are generally excludable from gross income if used for qualified education expenses (tuition, fees, books, supplies, and equipment required for courses). Amounts received for room and board are not considered qualified education expenses and are taxable.
Why the other options are wrong
- A. This incorrectly includes the tuition and fees portion, which is excludable.
- C. This incorrectly includes the entire scholarship, when a portion is excludable.
- D. This would be incorrect as the portion for room and board is taxable.
Scholarship Income Exclusion
A scholarship or fellowship grant is generally excludable from gross income if it is for qualified education expenses at an eligible educational institution.
- Qualified expenses include tuition, fees, books, supplies, and equipment required for courses.
- Amounts for room and board, travel, and optional equipment are taxable.
- The recipient must be a candidate for a degree.
Memory trick: Scholarship funds for 'Qualified' studies, tax-free they're seen, but 'Non-Qualified' uses, tax liability they glean.