In December 2012, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the Spring semester of 2013. However, she did not use the funds to pay the tuition until January 2013.Emily can exclude the $2,500 from her gross income in 2012.

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Emily received the scholarship in 2012, even though she did not use the funds until 2013. Since she is a cash basis taxpayer, the scholarship is considered taxable income in the year she received it, which is 2012. However, since the scholarship is for qualified education expenses, she can exclude it from her gross income using the rules for the American Opportunity Tax Credit or Lifetime Learning Credit. Therefore, she can exclude the $2,500 from her gross income in 2012.

In December 2012, Emily, a Cash Basis Taxpayer, Received a $2,500