Are Scholarships and Fellowships all taxable?
Per the IRS Tax Code, qualified scholarship and fellowship grants are treated as tax–free amounts if all the following conditions are met:
1. You are a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regular enrolled body of students in attendance at the place where it carries on its educational activities.
2. Amounts you receive as a scholarship or fellowship are used for tuition and fees required for enrollment or attendance at the educational institution, or for books, supplies, and equipment required for courses of instruction."
However, the amounts used for incidental expenses, such as room and board, travel, and optional equipment are includable as income.
In your specific case, clearly your spouse who received the Nursing scholarship appears to meet both above the requirements 1 and 2. Thus, it would seem if the amounts of the scholarship received by your wife that was used for tuition and fees would be not deductible.
The portion used for incidental expenses such as living expenses, room and boarding would be includable in income.
Generally speaking, your spouse will receive some kind of W-2 indicating the Scholarship received. If she did receive this, then the taxable amount must be reported on line 7.
If the taxable amount was not reported on a Form W-2, enter “SCH” and the taxable amount on the dotted line next to line 7.