Exclusion of Scholarships and Other Receipts for Educational Expenses addresses several important income tax issues relating to educational costs. The first section of this Portfolio introduces the reader to its scope, with a brief synopsis of each education-related issue discussed therein.

Educational receipts that fall within the definition of “qualified scholarships” or “qualified tuition reductions” are excluded from gross income. Gross income does not include any amount received as a qualified scholarship by an individual taxpayer who is a candidate for degree at an educational institution. In addition, gross income does not include the amount of a reduction in tuition provided to employees of certain organizations for education below the graduate level. Both of these exclusions are discussed in detail in Part II of this Portfolio.

This Portfolio also analyzes qualified tuition programs (Part III), Coverdell Education Savings Accounts (Part IV), interest on educational loans (Part V), penalty-free withdrawals from IRAs for amounts used to pay qualified higher education expenses (Part VI), and forgiveness of student loans (Part VII). The Portfolio also provides a discussion of information reporting requirements related to higher education tuition and related expenses (Part VIII). The deductibility of educational expenses, as business expenses or personal qualified higher education expenses, and the availability of tax credits, which can be utilized to offset the impact of certain educational costs, are discussed in 517 T.M., Educational Expenses and Credits.

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which cover every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.

Portfolio 518-1st: Exclusion of Scholarships and Other Receipts for Education

 Portfolio Description

 Authors

 Technical Advisors

 Description

 Detailed Analysis

 I. Introduction

 II. Exclusion of Scholarships, Fellowships, and Other Receipts for Education

 A. Historical Perspective

 1. Prior to the 1986 Tax Reform Act

 2. The 1986 TRA

 B. Current Law

 C. Section 117(a) Exclusion for Qualified Scholarships

 1. Definition of “Qualified Scholarship”

 a. In General

 b. Definition of Scholarship or Fellowship Grant

 (1) In General

 (2) Bingler — The Quid Pro Quo Test

 (3) Employer-Employee Relationship

 (a) In General

 (b) Grants by Private Foundations

 (4) Athletic Scholarships

 (5) Payments of “Prizes” Denominated as Scholarships

 (6) Self-Employment Taxes

 c. Definition of Qualified Tuition and Related Expenses

 2. Definition of Degree Candidate

 3. Definition of Educational Organization

 a. In General

 b. Teaching Hospitals and “Apprentice” Work

 4. Section 117(c) Exception from Exclusion for Payments for Services

 a. In General

 b. Health Professionals

 c. Grants to Faculty Members/Students

 d. Payments by or for the Benefit of Governmental Units

 e. Employment Tax Issues

 5. Recordkeeping Requirements

 6. Requirements for Obtaining Private Rulings

 D. Qualified Tuition Reduction Plans

 E. Miscellaneous Exclusions Related to Education

 1. Section 127

 2. Section 132

 3. Section 135

 F. Interrelationship of § 117 and § 74 and § 102

 III. Qualified Tuition Programs

 Introductory Material

 A. In General

 B. Definitions

 C. Eligibility Requirements for Qualified Tuition Programs

 D. Permissible Uses of Contributions

 E. Former Penalties on Refunds

 F. Reporting Requirements

 1. Return Filed with the IRS

 2. Statement Furnished to the Distributee

 3. Reports Between § 529 Programs

 G. Tax Treatment of Distributions from QTP

 1. In General

 2. Rollover Distributions

 3. Additional Tax

 4. Computing Earnings

 a. Amount of Earnings in a Distribution

 b. Examples

 5. Change in Designated Beneficiaries

 6. Aggregation of Accounts

 H. Estate, Gift and Generation-Skipping Transfer Tax Rules

 IV. Coverdell Education Savings Accounts

 A. In General

 B. Qualified Education Expenses

 1. Expenses for Higher Education

 2. Expenses for Elementary and Secondary Education

 C. Eligible Education Institution

 D. Contribution Limitations

 E. Distributions

 F. Transfers upon Divorce or Death

 G. Estate, Gift and Generation-Skipping Transfer Tax Rules

 H. Other Rules

 V. Interest on Educational Loans

 A. In General

 1. Treatment of Capitalized Interest and Certain Fees

 2. Interest Payments Made During Periods when Not Required

 3. Third Party Payments

 B. Maximum Deductible Amount and Phase-Out Rules

 C. Qualified Education Loan

 1. In General

 2. Qualified Higher Education Expenses

 3. Eligible Education Institution

 4. Eligible Student

 D. Pre-2002 60-Month Limitation

 1. Deferments and Forbearances

 2. Late Payments

 3. Refinancings, Consolidated Loans, and Collapsed Loans

 VI. Penalty-Free Withdrawal from IRA

 VII. Forgiveness of Student Loans

 VIII. Information Reporting Requirements

 A. In General

 B. Who Must File

 C. Content of Information Returns

 D. Payee Statements

 E. Penalty for Noncompliance

 Working Papers

 Table of Worksheets

 Worksheet 1 IRS Pub. 970, Tax Benefits for Education (Excerpt — Highlights of Tax Benefits for Education)

 Worksheet 2 IRS Publication 17, Your Federal Income Tax (Excerpt — Tax Benefits for Work-Related Education)

 Worksheet 3 Flow Chart — Taxation of Scholarships and Fellowship Grants

 Bibliography

 Periodicals

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