Tax scenarios can be a puzzling environment when it comes to taking a grant from a fellowship program. A student or a post-graduate candidate can often face tax notices when it comes to receiving a scholarship or a grant for their educational endeavor.

A common problem that one faces in getting a fellowship is that the money that a person receives from such grants is considered as an awarded income, and that becomes a part of the tax regime, and a person needs to file for the self-employment tax for that.

Now if you keep that amount in the gross income, then surely taxes will get deducted from it unless you have a lot of deductions and credits to omit from that income. Here, one can take the help of a Fresno tax attorney or some other lawyers who can guide the individual in this matter and can award them with the tax benefits.

When Scholarships and Grants Don’t Get Taxed?

When a person receives the scholarship, then it needs to be classified as to how much of that amount will go towards the academic pursuit, as only that part will remain tax-free. Here, a person will get a tax rebate on the tuition fees, books, and supplies of the academic material. All of these will not all under the self-employment tax, and that can be used for the work of the academic field.

When Scholarship Gets Taxed?

The next thing that one needs to understand is that certain non-qualified scholarships or grants might be used as a part of that income that is taxable. For example, the money used for lodging, travel and other personal expenses that a person from that grant can use. Hence, this income will fall under the taxable income and one needs to pay that to the IRS.

Guideline of IRS on Tax-Free Scholarship

The IRS considers fellowships and grants as a tax-free instrument of money given that one needs to show that the grant or money is coming from a registered university or institution. Once one can classify that income as a scholarship, then they can protect themselves from the self-employment tax.

The publication of IRS 970 clearly classifies what is considered taxable income and what is tax-free.

Avoiding the Errors of Misclassification

There are scholarships and grants people can get when they work for a firm or choose to work as freelancers. In the latter case, a person needs to report that income under the self-employment category, and for that, one needs to file taxes.

If you have made an error on your part, then there are chances that you can become subject to paying taxes. Here, one can face a tax debt attorney who can guide them to recover the losses one might have made by filing the grant income under the taxable column.

Choosing the Correct Tax Forms to Report Income

In accepting the grant money and not paying taxes, one needs to fill out the right forms or apply the multiple deduction or credit options that can make the gin tax insignificant.

These factors are some of the ways to avoid paying taxes on the gains one has made from grants and scholarships.

• Country: United States