Question

Kent "Flounder" Dorfman is a full-time student at Faber College. He is a senior and a member of Delta Tau Chai fraternity. The Deltas awarded Kent a $35,000 scholarship called "The Dean Wormer Double Secret Probation Memorial Scholarship". In the current year, Kent pays the following amounts to attend Faber College: Tuition - $26,000; Required lab fees - $300; Required books and supplies - $1,000; Room and board - $7,500. How much of the scholarship, if any, is taxable for federal income tax purposes? Explain how you arrived at your answer and cite at least one section of the Internal Revenue Code to support your answer. How much of the scholarship, if any, is NOT taxable for federal income tax purposes? Explain how you arrived at your answer.

Answer 1

As per §117(b)(2) a qualified scholarship that is solely used for qualified tuition and related expenses like fees, books and supplies that is necessary for such course in which admission is taken, related tuition fees and associated expenses are not taxable.

On the other side expenses on rooms and boarding are not qualified expenses so any amount spent on it is fully taxable. Another condition is that scholarship given should not be an exchange of service.

So amount of scholarship =		$35,000
Less: qualified expenses:
Tuition – 26000	26,000
Lab fees – 300	300
Books and supplies - 1000	1,000	27,300
Taxable amount		$7,700
Non taxable amount		27,300