IRC Section 117

Definition

IRC Section 117 pertains to the federal tax treatment of scholarships and fellowship grants, specifically stating that amounts received as scholarships or fellowship grants are excluded from gross income under certain conditions. This provision ensures that students can receive financial support for their education without facing tax implications, provided the funds are used for qualified expenses such as tuition and fees.

5 Must Know Facts For Your Next Test

1. IRC Section 117 allows for the exclusion of scholarships and fellowships from gross income only if they are used for qualified education expenses.
2. This section does not apply if the scholarship or fellowship requires the recipient to perform services in exchange for the financial aid.
3. Students who receive payments for teaching or research duties typically cannot exclude those amounts under IRC Section 117.
4. Qualified expenses under IRC Section 117 specifically include tuition and fees but do not typically cover room and board.
5. Certain non-degree programs may also qualify for tax-free treatment under IRC Section 117 if the funds are used for eligible expenses.

Review Questions

• How does IRC Section 117 influence a student's decision to accept scholarship or fellowship funding?
  • IRC Section 117 significantly influences a student's decision by providing a tax-free opportunity for funding their education. When students understand that scholarships and fellowships can be excluded from gross income, they may be more inclined to apply for these types of financial aid. The assurance that these funds will not contribute to their taxable income allows students to maximize their educational resources without worrying about added tax burdens.
• Discuss the limitations imposed by IRC Section 117 regarding the exclusion of scholarship and fellowship grants from gross income.
  • IRC Section 117 imposes several limitations on the exclusion of scholarships and fellowships from gross income. Notably, any scholarship or fellowship that requires the recipient to perform services is not eligible for exclusion. Additionally, while funds used for tuition and qualified educational expenses can be excluded, amounts allocated for room and board typically do not qualify. Understanding these limitations helps students navigate their financial aid options more effectively.
• Evaluate the broader implications of IRC Section 117 on educational funding and student financial health in the United States.
  • IRC Section 117 plays a crucial role in shaping educational funding and overall student financial health by facilitating access to financial resources without the burden of taxation. This provision encourages higher education participation by making it more affordable through tax-free scholarships and fellowships. However, its limitations also highlight challenges in covering all educational costs, particularly living expenses. Evaluating these aspects reveals both the benefits of promoting education while also indicating areas where students may still struggle financially.

Related terms

Qualified Expenses:

Expenses that qualify for tax benefits under specific provisions, including tuition, fees, and course materials that are necessary for a student’s education.

Scholarship: Financial aid awarded to students based on various criteria, which can include academic merit, financial need, or other factors, and does not require repayment.

Fellowship Grant: A type of financial assistance given to individuals, typically graduate students or researchers, to support their study or research efforts and may cover living expenses as well.