The primary confusion I have to deal with every year is that Harvard provides a series of mini-grants for graduate students, which they issue as scholarships. Scholarships are taxable as income, unless they are used to pay for tuition or required course supplies are not taxable, however. Scholarships which are used to I'm a graduate student, which means that the four courses I take every semester are "independent research," and obviously doing research is required. On the other hand, the IRS regulations specifically state that any scholarships used to pay for research are taxable. So if I use the mini-grant to pay for my research, is it taxable or not?
I actually asked an IRS representative a few years ago, and she replied that something counts are "required for coursework" only if everyone else taking that course has to buy it. If "everyone else" includes everyone else in the department doing independent research, then it's trivially the case that they are not required to do my research (though that would be really nice!), nor are they actually required to spend anything at all (some people's research costs more than others). If "everyone else" is only me -- this is independent research after all -- then the mini-grant is not taxable. This of course all hinges on whether or not "independent research" is actually a class. My understanding is that the federal government periodically brings action against Harvard, claiming that independent research is not a class.
Some people occasionally deduct the mini-grant expenditures as business expenses. This is not correct. According to the IRS, graduate students are not employees and have no business, and thus we have no business expenses (this reasoning also helps prevent graduate student unions -- you can't form a union if you aren't employed). And in any case, as I mentioned, we are specifically forbidden to write off the cost of doing research.
It's not just that the rules are confusing, they don't make sense. Why does the government want to tax students for the right to do research? How is that a good idea? Research benefits the public at large, and comes at a high opportunity cost for the researcher already (one could make more doing just about anything else). Why make us pay for it?
(It probably should be pointed out that Harvard could cough up the taxes itself, or they could administer the mini-grants as grants rather than as scholarships, though that would cost them more in terms of administrative overhead. Instead, Harvard specifically forbids using any portion of the mini-grant to pay for the incurred taxes. Though since they don't ask for any accounting, it's quite possible nobody pays any attention to that rule.)