Holly receives an athletic scholarship from Cornell University in the amount of $35,000 per year. The...

Holly receives an athletic scholarship from Cornell University in the amount of $35,000 per year. The annual tuition at Cornell University is $28,000 and room and board is $9,000. There are no other costs associated with attending Cornell. For personal income tax purposes, Holly may:

a.deduct $35,000 for AGI

b.deduct $28,000 from AGI

c.exclude $28,000 from her gross income

d.exclude $9,000 from her gross income

e.deduct $28,000 from AGI, subject to a 2% of AGI ceiling

Expert Solution

The correct answer is c.exclude $28,000 from her gross income

As per IRS Topic No. 421 "Scholarships, Fellowship Grants, and Other Grants":

"If you receive a scholarship, a fellowship grant, or other grant, all or part of the amounts you receive may be tax-free. Scholarships, fellowship grants, and other grants are tax-free if you meet the following conditions:

You're a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and
The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses at the educational institution."

However, amounts used for incidental expenses, such as room and board, travel, and optional equipment are not excludable and will therefore be taxable.

ekkarill92 answered 2 years ago

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