Federal Tax Accounting Research Project #4-63

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Tax Research Project #4-63

Facts:
Ann is a graduate economics student at State University. •State University awarded her a $1,000 scholarship.
She works as a half-time teaching assistant in the Economics Dept. at State University and is paid $7,000 per year and her tuition is waived; tuition is $8,000 without waiver. •Her salary is equal to that paid to other part-time instructors. •Ann paid $500 for her books and supplies and she incurred living expenses of $7,400.

Issues:
How much gross income must Ann report?

Reasoning’s and Authorities:
According to IRS Code, Sec. 117- “Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization”. In order to be considered a “qualified scholarship” Sec. 117(b)(1) further states that “the individual must establish that any amounts used were for qualified tuition and related expenses.” Furthermore, Sec. 117(d)(2) also allows from the exclusion of gross income “any qualified tuition reduction provided to an employee of an organization for the education of the employee.” Finally, Prop. Reg. 1.117-6(d)(3) further clarifies what amounts are not allowed to be excluded from gross income and states that “if only a portion of scholarship or fellowship grant represents payment for services, the grantor must determine the amount of the scholarship or fellowship grant (including any reduction in tuition or related expenses) to be allocated to payment for services.”

Conclusions:
Ann is allowed to exclude from gross income the $8,000 of tuition that is waived for her by State University in addition to the $500 that she paid for her books and supplies. The living expenses that she incurred are not allowed to be excluded from gross income. Therefore, Ann will report $7,500 as gross income.

Recommendations:
It is recommended that Ann keep records of the expenses she paid for books and supplies, in addition to any...
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