CPA Exam — REG (Regulation)Federal Taxation of IndividualsMedium
A client, single, age 40, received a $15,000 scholarship. $10,000 was used for tuition and required fees, and $5,000 was used for room and board. What amount of the scholarship must be included in their gross income?
- A$5,000
- B$0
- C$10,000
- D$15,000
Show answer & explanationAnswer & explanation
Correct answer: A. $5,000
Scholarships are generally tax-free if used for qualified education expenses (tuition, fees, books, supplies, equipment required by the institution). Amounts used for other expenses, such as room and board, are taxable. Therefore, the $5,000 used for room and board is included in gross income.
Why the other options are wrong
- B. This would be incorrect, as the portion used for room and board is taxable.
- C. This incorrectly includes the tuition and fees portion, which is generally tax-free.
- D. This incorrectly includes the entire scholarship, not distinguishing between qualified and non-qualified uses.
Scholarship Income Exclusion
Scholarships are generally excluded from gross income if they are used for qualified education expenses (tuition, fees, and course-related expenses required by the institution).
- Exclusion applies to degree candidates.
- Amounts for room, board, travel, or optional equipment are taxable.
- Payments for teaching, research, or other services are generally taxable.
Memory trick: Scholarship's path: tuition-free, room-and-board-taxable.