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Can I reduce income tax if my scholarship is instead issued as a conditional gift?

New Brunswick, NJ |

My accountant told me my research grant is taxable because it is a scholarship for a non degree-granting program. How is this possible? In my state, gifts are not taxable as income, so why are scholarships?
As I understand, a gift can be conditioned if the condition is not consideration. So can I eliminate the income tax if the donor issues the money as a gift conditioned on my performing the research, rather than as a scholarship?

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Attorney answers 1


If a scholarship is used for a degree program and is used specifically for tuition and fees, it may be deductible. The fact that you are not in a matriculating degree program is the problem here. Also, gifts ARE taxable above the annual exemption amount.

What your accountant told you is correct. No need to get into the philosophy of why he is correct in any great detail. I don't think there is any creative way for you to avoid that result, except to transfer to a degree-granting program and use the scholarship there.

Hope this helps.



Thank you for your reply. I know there is a federal gift tax on the donor. However, I was referring to my state, which does not include the calculation of gifts as income. Also, at the federal level, as I understand, I would not need to pay taxes on gifts; it is the donor who must pay a tax if (as I understand it) he gives more than $14,000 and has used up his $5 million lifetime credit. So, not wanting to get into the philosophy behind the law, I just want to commend that it does not seem to me to be logical that if a scholarship is given to me as a gift, I don’t need to pay any taxes on it (federal or state), but if it is given as a scholarship, I need to pay both federal and state income taxes.

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