Scholarships and fellowships are tax free and do not have to be included in income if you meet three conditions: You are working toward a degree at a qualified educational institution, the amounts you receive are used for mandatory tuition and fees or for books, supplies and equipment required for classes; and the money you receive is not a payment for your services. A qualified institution is one that maintains a regular faculty and curriculum. National Health Service Corps and Armed Forces Health Professions scholarships are not taxable even if they do require you to perform services.

If you use any part of a scholarship to pay for room and board, travel or optional equipment, you must include it in your income. Likewise, if you are required to teach, do research or perform other services to receive any part of a scholarship or fellowship, it must be included in your income.

For details, see IRS Publication 970, Tax Benefits for Higher Education, at www.irs.gov.