A qualified scholarship is excluded from the recipient's taxable income only if the proceeds are used for qualified tuition and related expenses. It is the responsibility of the recipient to establish that the amounts received qualify. To the extent the student is not able to substantiate the appropriate use of funds if asked by the IRS, the student could be required to recognize taxable income. If grant specifies that funds cannot be used for qualified tuition and related expenses, then the award cannot be considered a qualified scholarship and would be taxable to the recipient. With respect to related expenses, to qualify for exclusion from income, the fees, books, supplies and equipment must be required of all students taking this particular course.
Incidental expenses are taxable to the recipient.
Once the University has determined the residency status of the payee, the next issue should be to determine the type of payment being made. After the payment type has been determined, the University should start with the premise that all payments from U.S. sources made to on behalf of a nonresident alien are taxable unless the payment can be excluded or exempted from tax withholding. FICA rules provide an exception for services performed by a student who is enrolled and regularly attending classes at a college, university, or school. Since the student is ultimately responsible for establishing that grant amounts are properly excluded from his or her income for the year, the student is responsible for keeping appropriate records to substantiate qualified tuition and expenses. It is important for students to retain copies of bills, receipts, cancelled checks, or other documents that would show the use of the grant amount.