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Military Tax Free Zones

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Military Tax Free Zones

Military tax free zones 18. Military tax free zones   Alimony Table of Contents IntroductionSpouse or former spouse. Military tax free zones Divorce or separation instrument. Military tax free zones Useful Items - You may want to see: General RulesMortgage payments. Military tax free zones Taxes and insurance. Military tax free zones Other payments to a third party. Military tax free zones Instruments Executed After 1984Payments to a third party. Military tax free zones Exception. Military tax free zones Substitute payments. Military tax free zones Specifically designated as child support. Military tax free zones Contingency relating to your child. Military tax free zones Clearly associated with a contingency. Military tax free zones How To Deduct Alimony Paid How To Report Alimony Received Recapture Rule Introduction This chapter discusses the rules that apply if you pay or receive alimony. Military tax free zones It covers the following topics. Military tax free zones What payments are alimony. Military tax free zones What payments are not alimony, such as child support. Military tax free zones How to deduct alimony you paid. Military tax free zones How to report alimony you received as income. Military tax free zones Whether you must recapture the tax benefits of alimony. Military tax free zones Recapture means adding back in your income all or part of a deduction you took in a prior year. Military tax free zones Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. Military tax free zones It does not include voluntary payments that are not made under a divorce or separation instrument. Military tax free zones Alimony is deductible by the payer and must be included in the spouse's or former spouse's income. Military tax free zones Although this chapter is generally written for the payer of the alimony, the recipient can use the information to determine whether an amount received is alimony. Military tax free zones To be alimony, a payment must meet certain requirements. Military tax free zones Different requirements generally apply to payments under instruments executed after 1984 and to payments under instruments executed before 1985. Military tax free zones This chapter discusses the rules for payments under instruments executed after 1984. Military tax free zones If you need the rules for payments under pre-1985 instruments, get and keep a copy of the 2004 version of Publication 504. Military tax free zones That was the last year the information on pre-1985 instruments was included in Publication 504. Military tax free zones Use Table 18-1 in this chapter as a guide to determine whether certain payments are considered alimony. Military tax free zones Definitions. Military tax free zones   The following definitions apply throughout this chapter. Military tax free zones Spouse or former spouse. Military tax free zones   Unless otherwise stated, the term “spouse” includes former spouse. Military tax free zones Divorce or separation instrument. Military tax free zones   The term “divorce or separation instrument” means: A decree of divorce or separate maintenance or a written instrument incident to that decree, A written separation agreement, or A decree or any type of court order requiring a spouse to make payments for the support or maintenance of the other spouse. Military tax free zones This includes a temporary decree, an interlocutory (not final) decree, and a decree of alimony pendente lite (while awaiting action on the final decree or agreement). Military tax free zones Useful Items - You may want to see: Publication 504 Divorced or Separated Individuals General Rules The following rules apply to alimony regardless of when the divorce or separation instrument was executed. Military tax free zones Payments not alimony. Military tax free zones   Not all payments under a divorce or separation instrument are alimony. Military tax free zones Alimony does not include: Child support, Noncash property settlements, Payments that are your spouse's part of community income, as explained under Community Property in Publication 504, Payments to keep up the payer's property, or Use of the payer's property. Military tax free zones Payments to a third party. Military tax free zones   Cash payments, checks, or money orders to a third party on behalf of your spouse under the terms of your divorce or separation instrument can be alimony, if they otherwise qualify. Military tax free zones These include payments for your spouse's medical expenses, housing costs (rent, utilities, etc. Military tax free zones ), taxes, tuition, etc. Military tax free zones The payments are treated as received by your spouse and then paid to the third party. Military tax free zones Life insurance premiums. Military tax free zones   Alimony includes premiums you must pay under your divorce or separation instrument for insurance on your life to the extent your spouse owns the policy. Military tax free zones Payments for jointly-owned home. Military tax free zones   If your divorce or separation instrument states that you must pay expenses for a home owned by you and your spouse, some of your payments may be alimony. Military tax free zones Mortgage payments. Military tax free zones   If you must pay all the mortgage payments (principal and interest) on a jointly-owned home, and they otherwise qualify as alimony, you can deduct one-half of the total payments as alimony. Military tax free zones If you itemize deductions and the home is a qualified home, you can claim one-half of the interest in figuring your deductible interest. Military tax free zones Your spouse must report one-half of the payments as alimony received. Military tax free zones If your spouse itemizes deductions and the home is a qualified home, he or she can claim one-half of the interest on the mortgage in figuring deductible interest. Military tax free zones Taxes and insurance. Military tax free zones   If you must pay all the real estate taxes or insurance on a home held as tenants in common, you can deduct one-half of these payments as alimony. Military tax free zones Your spouse must report one-half of these payments as alimony received. Military tax free zones If you and your spouse itemize deductions, you can each claim one-half of the real estate taxes and none of the home insurance. Military tax free zones    If your home is held as tenants by the entirety or joint tenants, none of your payments for taxes or insurance are alimony. Military tax free zones But if you itemize deductions, you can claim all of the real estate taxes and none of the home insurance. Military tax free zones Other payments to a third party. Military tax free zones   If you made other third-party payments, see Publication 504 to see whether any part of the payments qualifies as alimony. Military tax free zones Instruments Executed After 1984 The following rules for alimony apply to payments under divorce or separation instruments executed after 1984. Military tax free zones Exception for instruments executed before 1985. Military tax free zones   There are two situations where the rules for instruments executed after 1984 apply to instruments executed before 1985. Military tax free zones A divorce or separation instrument executed before 1985 and then modified after 1984 to specify that the after-1984 rules will apply. Military tax free zones A temporary divorce or separation instrument executed before 1985 and incorporated into, or adopted by, a final decree executed after 1984 that: Changes the amount or period of payment, or Adds or deletes any contingency or condition. Military tax free zones   For the rules for alimony payments under pre-1985 instruments not meeting these exceptions, get the 2004 version of Publication 504 at www. Military tax free zones irs. Military tax free zones gov/pub504. Military tax free zones Example 1. Military tax free zones In November 1984, you and your former spouse executed a written separation agreement. Military tax free zones In February 1985, a decree of divorce was substituted for the written separation agreement. Military tax free zones The decree of divorce did not change the terms for the alimony you pay your former spouse. Military tax free zones The decree of divorce is treated as executed before 1985. Military tax free zones Alimony payments under this decree are not subject to the rules for payments under instruments executed after 1984. Military tax free zones Example 2. Military tax free zones Assume the same facts as in Example 1 except that the decree of divorce changed the amount of the alimony. Military tax free zones In this example, the decree of divorce is not treated as executed before 1985. Military tax free zones The alimony payments are subject to the rules for payments under instruments executed after 1984. Military tax free zones Alimony requirements. Military tax free zones   A payment to or for a spouse under a divorce or separation instrument is alimony if the spouses do not file a joint return with each other and all the following requirements are met. Military tax free zones The payment is in cash. Military tax free zones The instrument does not designate the payment as not alimony. Military tax free zones Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Military tax free zones There is no liability to make any payment (in cash or property) after the death of the recipient spouse. Military tax free zones The payment is not treated as child support. Military tax free zones Each of these requirements is discussed below. Military tax free zones Cash payment requirement. Military tax free zones   Only cash payments, including checks and money orders, qualify as alimony. Military tax free zones The following do not qualify as alimony. Military tax free zones Transfers of services or property (including a debt instrument of a third party or an annuity contract). Military tax free zones Execution of a debt instrument by the payer. Military tax free zones The use of the payer's property. Military tax free zones Payments to a third party. Military tax free zones   Cash payments to a third party under the terms of your divorce or separation instrument can qualify as cash payments to your spouse. Military tax free zones See Payments to a third party under General Rules, earlier. Military tax free zones   Also, cash payments made to a third party at the written request of your spouse may qualify as alimony if all the following requirements are met. Military tax free zones The payments are in lieu of payments of alimony directly to your spouse. Military tax free zones The written request states that both spouses intend the payments to be treated as alimony. Military tax free zones You receive the written request from your spouse before you file your return for the year you made the payments. Military tax free zones Payments designated as not alimony. Military tax free zones   You and your spouse can designate that otherwise qualifying payments are not alimony. Military tax free zones You do this by including a provision in your divorce or separation instrument that states the payments are not deductible as alimony by you and are excludable from your spouse's income. Military tax free zones For this purpose, any instrument (written statement) signed by both of you that makes this designation and that refers to a previous written separation agreement is treated as a written separation agreement (and therefore a divorce or separation instrument). Military tax free zones If you are subject to temporary support orders, the designation must be made in the original or a later temporary support order. Military tax free zones   Your spouse can exclude the payments from income only if he or she attaches a copy of the instrument designating them as not alimony to his or her return. Military tax free zones The copy must be attached each year the designation applies. Military tax free zones Spouses cannot be members of the same household. Military tax free zones    Payments to your spouse while you are members of the same household are not alimony if you are legally separated under a decree of divorce or separate maintenance. Military tax free zones A home you formerly shared is considered one household, even if you physically separate yourselves in the home. Military tax free zones   You are not treated as members of the same household if one of you is preparing to leave the household and does leave no later than 1 month after the date of the payment. Military tax free zones Exception. Military tax free zones   If you are not legally separated under a decree of divorce or separate maintenance, a payment under a written separation agreement, support decree, or other court order may qualify as alimony even if you are members of the same household when the payment is made. Military tax free zones Table 18-1. Military tax free zones Alimony Requirements (Instruments Executed After 1984) Payments ARE alimony if all of the following are true: Payments are NOT alimony if any of the following are true: Payments are required by a divorce or separation instrument. Military tax free zones Payments are not required by a divorce or separation instrument. Military tax free zones Payer and recipient spouse do not file a joint return with each other. Military tax free zones Payer and recipient spouse file a joint return with each other. Military tax free zones Payment is in cash (including checks or money orders). Military tax free zones Payment is: Not in cash, A noncash property settlement, Spouse's part of community income, or To keep up the payer's property. Military tax free zones Payment is not designated in the instrument as not alimony. Military tax free zones Payment is designated in the instrument as not alimony. Military tax free zones Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Military tax free zones Spouses legally separated under a decree of divorce or separate maintenance are members of the same household. Military tax free zones Payments are not required after death of the recipient spouse. Military tax free zones Payments are required after death of the recipient spouse. Military tax free zones Payment is not treated as child support. Military tax free zones Payment is treated as child support. Military tax free zones These payments are deductible by the payer and includible in income by the recipient. Military tax free zones These payments are neither deductible by the payer nor includible in income by the recipient. Military tax free zones Liability for payments after death of recipient spouse. Military tax free zones   If any part of payments you make must continue to be made for any period after your spouse's death, that part of your payments is not alimony, whether made before or after the death. Military tax free zones If all of the payments would continue, then none of the payments made before or after the death are alimony. Military tax free zones   The divorce or separation instrument does not have to expressly state that the payments cease upon the death of your spouse if, for example, the liability for continued payments would end under state law. Military tax free zones Example. Military tax free zones You must pay your former spouse $10,000 in cash each year for 10 years. Military tax free zones Your divorce decree states that the payments will end upon your former spouse's death. Military tax free zones You must also pay your former spouse or your former spouse's estate $20,000 in cash each year for 10 years. Military tax free zones The death of your spouse would not terminate these payments under state law. Military tax free zones The $10,000 annual payments may qualify as alimony. Military tax free zones The $20,000 annual payments that do not end upon your former spouse's death are not alimony. Military tax free zones Substitute payments. Military tax free zones   If you must make any payments in cash or property after your spouse's death as a substitute for continuing otherwise qualifying payments before the death, the otherwise qualifying payments are not alimony. Military tax free zones To the extent that your payments begin, accelerate, or increase because of the death of your spouse, otherwise qualifying payments you made may be treated as payments that were not alimony. Military tax free zones Whether or not such payments will be treated as not alimony depends on all the facts and circumstances. Military tax free zones Example 1. Military tax free zones Under your divorce decree, you must pay your former spouse $30,000 annually. Military tax free zones The payments will stop at the end of 6 years or upon your former spouse's death, if earlier. Military tax free zones Your former spouse has custody of your minor children. Military tax free zones The decree provides that if any child is still a minor at your spouse's death, you must pay $10,000 annually to a trust until the youngest child reaches the age of majority. Military tax free zones The trust income and corpus (principal) are to be used for your children's benefit. Military tax free zones These facts indicate that the payments to be made after your former spouse's death are a substitute for $10,000 of the $30,000 annual payments. Military tax free zones Of each of the $30,000 annual payments, $10,000 is not alimony. Military tax free zones Example 2. Military tax free zones Under your divorce decree, you must pay your former spouse $30,000 annually. Military tax free zones The payments will stop at the end of 15 years or upon your former spouse's death, if earlier. Military tax free zones The decree provides that if your former spouse dies before the end of the 15-year period, you must pay the estate the difference between $450,000 ($30,000 × 15) and the total amount paid up to that time. Military tax free zones For example, if your spouse dies at the end of the tenth year, you must pay the estate $150,000 ($450,000 − $300,000). Military tax free zones These facts indicate that the lump-sum payment to be made after your former spouse's death is a substitute for the full amount of the $30,000 annual payments. Military tax free zones None of the annual payments are alimony. Military tax free zones The result would be the same if the payment required at death were to be discounted by an appropriate interest factor to account for the prepayment. Military tax free zones Child support. Military tax free zones   A payment that is specifically designated as child support or treated as specifically designated as child support under your divorce or separation instrument is not alimony. Military tax free zones The amount of child support may vary over time. Military tax free zones Child support payments are not deductible by the payer and are not taxable to the recipient. Military tax free zones Specifically designated as child support. Military tax free zones   A payment will be treated as specifically designated as child support to the extent that the payment is reduced either: On the happening of a contingency relating to your child, or At a time that can be clearly associated with the contingency. Military tax free zones A payment may be treated as specifically designated as child support even if other separate payments are specifically designated as child support. Military tax free zones Contingency relating to your child. Military tax free zones   A contingency relates to your child if it depends on any event relating to that child. Military tax free zones It does not matter whether the event is certain or likely to occur. Military tax free zones Events relating to your child include the child's: Becoming employed, Dying, Leaving the household, Leaving school, Marrying, or Reaching a specified age or income level. Military tax free zones Clearly associated with a contingency. Military tax free zones   Payments that would otherwise qualify as alimony are presumed to be reduced at a time clearly associated with the happening of a contingency relating to your child only in the following situations. Military tax free zones The payments are to be reduced not more than 6 months before or after the date the child will reach 18, 21, or local age of majority. Military tax free zones The payments are to be reduced on two or more occasions that occur not more than 1 year before or after a different one of your children reaches a certain age from 18 to 24. Military tax free zones This certain age must be the same for each child, but need not be a whole number of years. Military tax free zones In all other situations, reductions in payments are not treated as clearly associated with the happening of a contingency relating to your child. Military tax free zones   Either you or the IRS can overcome the presumption in the two situations above. Military tax free zones This is done by showing that the time at which the payments are to be reduced was determined independently of any contingencies relating to your children. Military tax free zones For example, if you can show that the period of alimony payments is customary in the local jurisdiction, such as a period equal to one-half of the duration of the marriage, you can overcome the presumption and may be able to treat the amount as alimony. Military tax free zones How To Deduct Alimony Paid You can deduct alimony you paid, whether or not you itemize deductions on your return. Military tax free zones You must file Form 1040. Military tax free zones You cannot use Form 1040A or Form 1040EZ. Military tax free zones Enter the amount of alimony you paid on Form 1040, line 31a. Military tax free zones In the space provided on line 31b, enter your spouse's social security number (SSN) or individual taxpayer identification number (ITIN). Military tax free zones If you paid alimony to more than one person, enter the SSN or ITIN of one of the recipients. Military tax free zones Show the SSN or ITIN and amount paid to each other recipient on an attached statement. Military tax free zones Enter your total payments on line 31a. Military tax free zones You must provide your spouse's SSN or ITIN. Military tax free zones If you do not, you may have to pay a $50 penalty and your deduction may be disallowed. Military tax free zones For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. Military tax free zones How To Report Alimony Received Report alimony you received as income on Form 1040, line 11. Military tax free zones You cannot use Form 1040A or Form 1040EZ. Military tax free zones You must give the person who paid the alimony your SSN or ITIN. Military tax free zones If you do not, you may have to pay a $50 penalty. Military tax free zones Recapture Rule If your alimony payments decrease or end during the first 3 calendar years, you may be subject to the recapture rule. Military tax free zones If you are subject to this rule, you have to include in income in the third year part of the alimony payments you previously deducted. Military tax free zones Your spouse can deduct in the third year part of the alimony payments he or she previously included in income. Military tax free zones The 3-year period starts with the first calendar year you make a payment qualifying as alimony under a decree of divorce or separate maintenance or a written separation agreement. Military tax free zones Do not include any time in which payments were being made under temporary support orders. Military tax free zones The second and third years are the next 2 calendar years, whether or not payments are made during those years. Military tax free zones The reasons for a reduction or end of alimony payments that can require a recapture include: A change in your divorce or separation instrument, A failure to make timely payments, A reduction in your ability to provide support, or A reduction in your spouse's support needs. Military tax free zones When to apply the recapture rule. Military tax free zones   You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year. Military tax free zones   When you figure a decrease in alimony, do not include the following amounts. Military tax free zones Payments made under a temporary support order. Military tax free zones Payments required over a period of at least 3 calendar years that vary because they are a fixed part of your income from a business or property, or from compensation for employment or self-employment. Military tax free zones Payments that decrease because of the death of either spouse or the remarriage of the spouse receiving the payments before the end of the third year. Military tax free zones Figuring the recapture. Military tax free zones   You can use Worksheet 1 in Publication 504 to figure recaptured alimony. Military tax free zones Including the recapture in income. Military tax free zones   If you must include a recapture amount in income, show it on Form 1040, line 11 (“Alimony received”). Military tax free zones Cross out “received” and enter “recapture. Military tax free zones ” On the dotted line next to the amount, enter your spouse's last name and SSN or ITIN. Military tax free zones Deducting the recapture. Military tax free zones   If you can deduct a recapture amount, show it on Form 1040, line 31a (“Alimony paid”). Military tax free zones Cross out “paid” and enter “recapture. Military tax free zones ” In the space provided, enter your spouse's SSN or ITIN. Military tax free zones Prev  Up  Next   Home   More Online Publications
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The Military Tax Free Zones

Military tax free zones 1. Military tax free zones   Scholarships, Fellowships, Grants, and Tuition Reductions Table of Contents Reminder Introduction Scholarships and FellowshipsTax-Free Scholarships and Fellowships Taxable Scholarships and Fellowships Reporting Scholarships and Fellowships Other Types of Educational AssistanceFulbright Grants Pell Grants and Other Title IV Need-Based Education Grants Payment to Service Academy Cadets Veterans' Benefits Qualified Tuition Reduction Reminder Individual retirement arrangements (IRAs). Military tax free zones  You can set up and make contributions to an IRA if you receive taxable compensation. Military tax free zones Under this rule, a taxable scholarship or fellowship is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. Military tax free zones For more information about IRAs, see Publication 590. Military tax free zones Introduction This chapter discusses the income tax treatment of various types of educational assistance you may receive if you are studying, teaching, or researching in the United States. Military tax free zones The educational assistance can be for a primary or secondary school, a college or university, or a vocational school. Military tax free zones Included are discussions of: Scholarships, Fellowships, Need-based education grants, such as a Pell Grant, and Qualified tuition reductions. Military tax free zones Many types of educational assistance are tax free if they meet the requirements discussed here. Military tax free zones Special rules apply to U. Military tax free zones S. Military tax free zones citizens and resident aliens who have received scholarships or fellowships for studying, teaching, or researching abroad. Military tax free zones For information about these rules, see Publication 54, Tax Guide for U. Military tax free zones S. Military tax free zones Citizens and Resident Aliens Abroad. Military tax free zones Scholarships and Fellowships A scholarship is generally an amount paid or allowed to, or for the benefit of, a student (whether an undergraduate or a graduate) at an educational institution to aid in the pursuit of his or her studies. Military tax free zones A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Military tax free zones Amount of scholarship or fellowship. Military tax free zones   The amount of a scholarship or fellowship includes the following: The value of contributed services and accommodations. Military tax free zones This includes such services and accommodations as room (lodging), board (meals), laundry service, and similar services or accommodations that are received by an individual as a part of a scholarship or fellowship. Military tax free zones The amount of tuition, matriculation, and other fees that are paid or remitted to the student to aid the student in pursuing study or research. Military tax free zones Any amount received in the nature of a family allowance as a part of a scholarship or fellowship. Military tax free zones Tax-Free Scholarships and Fellowships A scholarship or fellowship is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution. Military tax free zones A scholarship or fellowship is tax free only to the extent: It does not exceed your expenses; It is not designated or earmarked for other purposes (such as room and board), and does not require (by its terms) that it cannot be used for qualified education expenses; and It does not represent payment for teaching, research, or other services required as a condition for receiving the scholarship. Military tax free zones (But for exceptions, see Payment for services,later. Military tax free zones Use Worksheet 1–1 to figure the amount of a scholarship or fellowship you can exclude from gross income. Military tax free zones Candidate for a degree. Military tax free zones   You are a candidate for a degree if you: Attend a primary or secondary school or are pursuing a degree at a college or university, or Attend an educational institution that: Provides a program that is acceptable for full credit toward a bachelor's or higher degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and Is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency. Military tax free zones Eligible educational institution. Military tax free zones   An eligible educational institution is one whose primary function is the presentation of formal instruction and that normally 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. Military tax free zones Qualified education expenses. Military tax free zones   For purposes of tax-free scholarships and fellowships, these are expenses for: Tuition and fees required to enroll at or attend an eligible educational institution, and Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. Military tax free zones These items must be required of all students in your course of instruction. Military tax free zones Expenses that do not qualify. Military tax free zones   Qualified education expenses do not include the cost of: Room and board, Travel, Research, Clerical help, or Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution. Military tax free zones Payment for services. Military tax free zones   Generally, you cannot exclude from your gross income the part of any scholarship or fellowship that represents payment for teaching, research, or other services required as a condition for receiving the scholarship. Military tax free zones This applies even if all candidates for a degree must perform the services to receive the degree. Military tax free zones (See exceptions next. Military tax free zones ) Exceptions. Military tax free zones   You do not have to treat as payment for services the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under: The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program. Military tax free zones Example 1. Military tax free zones You received a scholarship of $2,500. Military tax free zones The scholarship was not received under either of the exceptions mentioned above. Military tax free zones As a condition for receiving the scholarship, you must serve as a part-time teaching assistant. Military tax free zones Of the $2,500 scholarship, $1,000 represents payment for teaching. Military tax free zones The provider of your scholarship gives you a Form W-2 showing $1,000 as income. Military tax free zones Your qualified education expenses were at least $1,500. Military tax free zones Assuming that all other conditions are met, $1,500 of your scholarship is tax free. Military tax free zones The $1,000 you received for teaching is taxable. Military tax free zones Example 2. Military tax free zones You are a candidate for a degree at a medical school. Military tax free zones You receive a scholarship (not under either of the exceptions mentioned above) for your medical education and training. Military tax free zones The terms of your scholarship require you to perform future services. Military tax free zones A substantial penalty applies if you do not comply. Military tax free zones The entire amount of your grant is taxable as payment for services in the year it is received. Military tax free zones Athletic Scholarships An athletic scholarship is tax free only if and to the extent it meets the requirements discussed later. Military tax free zones Worksheet 1-1. Military tax free zones    You can use Worksheet 1-1, Taxable Scholarship and Fellowship Income , later, to figure the tax-free and taxable parts of your athletic scholarship. Military tax free zones    Worksheet 1-1. Military tax free zones Taxable Scholarship and Fellowship Income 1. Military tax free zones Enter the total amount of any scholarship or fellowship for 2013. Military tax free zones See Amount of scholarship or fellowship, earlier. Military tax free zones 1. Military tax free zones       If you are a degree candidate at an eligible educational institution, go to line 2. Military tax free zones If you are not a degree candidate at an eligible educational institution, stop here. Military tax free zones The entire amount is taxable. Military tax free zones For information on how to report this amount on your tax return, see Reporting Scholarships and Fellowships , earlier, in this chapter. Military tax free zones       2. Military tax free zones Enter the amount from line 1 that was for teaching, research, or any other services required as a condition for receiving the scholarship. Military tax free zones (Do not include amounts received for these items under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program. Military tax free zones ) 2. Military tax free zones     3. Military tax free zones Subtract line 2 from line 1 3. Military tax free zones     4. Military tax free zones Enter the amount from line 3 that your scholarship or fellowship required you to use for other than qualified education expenses 4. Military tax free zones     5. Military tax free zones Subtract line 4 from line 3 5. Military tax free zones     6. Military tax free zones Enter the amount of your qualified education expenses 6. Military tax free zones     7. Military tax free zones Enter the smaller of line 5 or line 6. Military tax free zones This amount is the most you can exclude from your gross income (the tax-free part of the scholarship or fellowship) 7. Military tax free zones     8. Military tax free zones Subtract line 7 from line 5 8. Military tax free zones     9. Military tax free zones Taxable part. Military tax free zones Add lines 2, 4, and 8. Military tax free zones See Reporting Scholarships and Fellowships , earlier, for how to report this amount on your tax return 9. Military tax free zones     Taxable Scholarships and Fellowships If and to the extent your scholarship or fellowship does not meet the requirements described earlier, it is taxable and must be included in gross income. Military tax free zones You can use Worksheet 1–1, Taxable Scholarship and Fellowship Income, later, to figure the tax-free and taxable parts of your scholarship or fellowship. Military tax free zones Reporting Scholarships and Fellowships Whether you must report your scholarship or fellowship depends on whether you must file a return and whether any part of your scholarship or fellowship is taxable. Military tax free zones If your only income is a completely tax-free scholarship or fellowship, you do not have to file a tax return and no reporting is necessary. Military tax free zones If all or part of your scholarship or fellowship is taxable and you are required to file a tax return, report the taxable amount as explained below. Military tax free zones You must report the taxable amount whether or not you received a Form W-2. Military tax free zones If you receive an incorrect Form W-2, ask the payer for a corrected one. Military tax free zones For information on whether you must file a return, see Publication 501, Exemptions, Standard Deduction, and Filing Information, or your income tax form instructions. Military tax free zones How To Report How you report any taxable scholarship or fellowship income depends on which return you file. Military tax free zones Form 1040EZ. Military tax free zones   If you file Form 1040EZ, include the taxable amount in the total on line 1. Military tax free zones If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 1. Military tax free zones Form 1040A. Military tax free zones   If you file Form 1040A, include the taxable amount in the total on line 7. Military tax free zones If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 7. Military tax free zones Form 1040. Military tax free zones   If you file Form 1040, include the taxable amount in the total on line 7. Military tax free zones If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 7. Military tax free zones Schedule SE (Form 1040). Military tax free zones   To determine your net earnings from self-employment, include amounts you receive under a scholarship as pay for your services that are reported to you on Form 1099-MISC, Miscellaneous Income. Military tax free zones If your net earnings are $400 or more, you must pay self-employment tax. Military tax free zones Use Schedule SE, Self-Employment Tax, to figure this tax. Military tax free zones Form 1040NR. Military tax free zones   If you file Form 1040NR, report the taxable amount on line 12. Military tax free zones Generally, you must report the amount shown in box 2 of Form(s) 1042-S, Foreign Person's U. Military tax free zones S. Military tax free zones Source Income Subject to Withholding. Military tax free zones See the Instructions for Form 1040NR for more information. Military tax free zones Form 1040NR-EZ. Military tax free zones   If you file Form 1040NR-EZ, report the taxable amount on line 5. Military tax free zones Generally, you must report the amount shown in box 2 of Form(s) 1042-S. Military tax free zones See the Instructions for Form 1040NR-EZ for more information. Military tax free zones Other Types of Educational Assistance The following discussions deal with other common types of educational assistance. Military tax free zones Fulbright Grants A Fulbright grant is generally treated as a scholarship or fellowship in figuring how much of the grant is tax free. Military tax free zones Pell Grants and Other Title IV Need-Based Education Grants These need-based grants are treated as scholarships for purposes of determining their tax treatment. Military tax free zones They are tax free to the extent used for qualified education expenses during the period for which a grant is awarded. Military tax free zones Payment to Service Academy Cadets An appointment to a United States military academy is not a scholarship or fellowship. Military tax free zones Payment you receive as a cadet or midshipman at an armed services academy is pay for personal services and will be reported to you in box 1 of Form W-2. Military tax free zones Include this pay in your income in the year you receive it unless one of the exceptions, discussed earlier under Payment for services , applies. Military tax free zones Veterans' Benefits Payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free. Military tax free zones Do not include these payments as income on your federal tax return. Military tax free zones If you qualify for one or more of the education benefits discussed in chapters 2 through 12, you may have to reduce the amount of education expenses qualifying for a specific benefit by part or all of your VA payments. Military tax free zones This applies only to the part of your VA payments that is required to be used for education expenses. Military tax free zones You may want to visit the Veteran's Administration website at www. Military tax free zones gibill. Military tax free zones va. Military tax free zones gov for specific information about the various VA benefits for education. Military tax free zones Example. Military tax free zones You have returned to college and are receiving two education benefits under the latest GI Bill: (1) a $1,534 monthly basic housing allowance (BHA) that is directly deposited to your checking account, and (2) $3,840 paid directly to your college for tuition. Military tax free zones Neither of these benefits is taxable and you do not report them on your tax return. Military tax free zones You also want to claim an American opportunity credit on your return. Military tax free zones You paid $5,000 in qualified education expenses (see chapter 2, American Opportunity Credit , later). Military tax free zones To figure the amount of credit, you must first subtract the $3,840 from your qualified education expenses because this payment under the GI Bill was required to be used for education expenses. Military tax free zones You do not subtract any amount of the BHA because it was paid to you and its use was not restricted. Military tax free zones Qualified Tuition Reduction If you are allowed to study tuition free or for a reduced rate of tuition, you may not have to pay tax on this benefit. Military tax free zones This is called a “tuition reduction. Military tax free zones ” You do not have to include a qualified tuition reduction in your income. Military tax free zones A tuition reduction is qualified only if you receive it from, and use it at, an eligible educational institution. Military tax free zones You do not have to use the tuition reduction at the eligible educational institution from which you received it. Military tax free zones In other words, if you work for an eligible educational institution and the institution arranges for you to take courses at another eligible educational institution without paying any tuition, you may not have to include the value of the free courses in your income. Military tax free zones The rules for determining if a tuition reduction is qualified, and therefore tax free, are different if the education provided is below the graduate level or is graduate education. Military tax free zones You must include in your income any tuition reduction you receive that is payment for your services. Military tax free zones Eligible educational institution. Military tax free zones   An eligible educational institution is one 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. Military tax free zones Officers, owners, and highly compensated employees. Military tax free zones   Qualified tuition reductions apply to officers, owners, or highly compensated employees only if benefits are available to employees on a nondiscriminatory basis. Military tax free zones This means that the tuition reduction benefits must be available on substantially the same basis to each member of a group of employees. Military tax free zones The group must be defined under a reasonable classification set up by the employer. Military tax free zones The classification must not discriminate in favor of owners, officers, or highly compensated employees. Military tax free zones Payment for services. Military tax free zones   Generally, you must include in income the part of any qualified tuition reduction that represents payment for teaching, research, or other services by the student required as a condition of receiving the qualified tuition reduction. Military tax free zones This applies even if all candidates for a degree must perform the services to receive the degree. Military tax free zones (See below for exceptions. Military tax free zones ) Exceptions. Military tax free zones   You do not have to include in income the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under: The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program. Military tax free zones Education Below the Graduate Level If you receive a tuition reduction for education below the graduate level (including primary, secondary, or high school), it is a qualified tuition reduction, and therefore tax free, only if your relationship to the educational institution providing the benefit is described below. Military tax free zones You are an employee of the eligible educational institution. Military tax free zones You were an employee of the eligible educational institution, but you retired or left on disability. Military tax free zones You are a widow or widower of an individual who died while an employee of the eligible educational institution or who retired or left on disability. Military tax free zones You are the dependent child or spouse of an individual described in (1) through (3), above. Military tax free zones Child of deceased parents. Military tax free zones   For purposes of the qualified tuition reduction, a child is a dependent child if the child is under age 25 and both parents have died. Military tax free zones Child of divorced parents. Military tax free zones   For purposes of the qualified tuition reduction, a dependent child of divorced parents is treated as the dependent of both parents. Military tax free zones Graduate Education A tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following requirements are met. Military tax free zones It is provided by an eligible educational institution. Military tax free zones You are a graduate student who performs teaching or research activities for the educational institution. Military tax free zones You must include in income any other tuition reductions for graduate education that you receive. Military tax free zones How To Report Any tuition reduction that is taxable should be included as wages in box 1 of your Form W-2. Military tax free zones Report the amount from Form W-2, box 1, on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ). Military tax free zones Prev  Up  Next   Home   More Online Publications