The awards can be used for tuition, fees, books, certain amounts of room and board expenses, and supplies or equipment required for enrollment or attendance at the eligible educational institution. The Governor's Scholarship Programs have been designed so that scholarship awards, including the earnings, used for certain qualified higher education expenses while a student is pursuing a degree, will not be subject to federal income taxation.
Notwithstanding the design of the Governor's Scholarship Programs, the Internal Revenue Service could take the position that scholarship awards are subject to federal income taxation in the year the student is notified of the award. Students and their families should consult their tax advisors regarding the federal tax treatment of scholarship awards.
California law provides that these scholarship awards, including the earnings, are exempt from California income tax. However, any portion of the awards or earnings withdrawn as payment for room and board costs will be subject to federal income tax in the tax year it was withdrawn. Students must report such amount to the Internal Revenue Service when filing their tax return. Similarly, any portion of a scholarship award used to pay for qualified higher education expenses at correspondence schools may not be eligible for federal tax-exempt treatment.
The Internal Revenue Service has indicated that a scholarship is tax-free only if you are pursuing a degree at an educational institution.
The term pursuing a degree is defined as a student (full or part-time) who:
- Attends a secondary school or is pursuing a degree at a college or university, or
- Attends an accredited educational institution that is authorized to provide:
- A program that is acceptable for full credit toward a bachelor's or higher degree, or
- A program of training to prepare students for gainful employment in a recognized occupation.
The educational institution must be eligible to participate in Title IV financial aid programs.