Fullbright Grants, Pell Grants and other need-based education grants are treated as scholarships for purposes of determining whether they are taxable, and are subject to the same rules described above. Appointments to a United States military academy are not considered scholarships, and the income you receive as a cadet or midshipman is taxable compensation for personal services and will be reported on Form W-2.
Veterans’ Benefits
Veterans’ benefits you receive for education, training, or subsistence are not taxable. You may need to take these benefits into consideration in determining the amount of any tax benefits for education for which you may qualify. You may have to reduce the amount of education expenses eligible for the tax benefit by the amount of tax-exempt veterans’ benefits you receive.
Qualified Tuition Reduction
This is a reduction in tuition granted by the educational institution. Whether or not it is tax-free depends on whether it is for education at or below the graduate level. And, in order to be tax-free, the tuition reduction must not represent compensation for personal services.
Below Graduate Level
Education below the graduate level includes primary and secondary education, and undergraduate college or university studies. The qualified tuition reduction is tax-free if it is provided to the following individuals:
A current employee of the educational institution
A former employee of the education institution, who retired or is disabled
A widow or widower of a former employee
A dependent child or spouse of any of the above.
Owners, officers, and highly compensated employees can take advantage of tax-free qualified tuition reductions only if the benefits are not discriminatory and are made available to all members of a group of employees.