Scholarship Tax Rules For International Students

Whether or not international students pay taxes on scholarships depends on the country in which they are studying and their visa status. In the US, for example, international students are generally subject to a 14% federal and 3.75% state withholding rate on the taxable portion of their scholarships, although this rate may be reduced if the student has a particular type of visa. Students from countries with a tax treaty with the US may be exempt from paying taxes on scholarships, but they must enter their data into a database to confirm their eligibility.

Do international students pay taxes on scholarships?

International students' tax residency status

In Canada, on the other hand, the tax residency status of international students is determined by their residential ties to the country. If an international student establishes significant residential ties with Canada, they are considered a resident for income tax purposes. Residential ties can include owning a home in Canada, having a spouse or common-law partner, or having a dependent who is moving to Canada to live with them. Even if an international student does not have significant residential ties, they may still be deemed a resident of Canada for tax purposes if they stay in the country for 183 days or more in a calendar year and are not considered a resident of their home country per a tax treaty.

It is important for international students to understand their tax residency status, as it determines their tax obligations and benefits in their country of study. For example, in Canada, international students who are considered residents for tax purposes may be eligible for benefit and credit payments that can help with their cost of living. Additionally, as nonresident aliens in the US, international students are required to file taxes on any taxable scholarships, fellowships, or grants they receive, even if there is no minimum dollar amount of income triggering the requirement.

Tax treaties between the US and foreign countries

International students may have to pay taxes on scholarships and grants they receive in the US. The scholarship tax depends on several factors, including how the scholarship is used. Qualified expenses, such as tuition, fees, books, supplies, and equipment required for courses, are generally tax-free. On the other hand, non-qualified expenses like room and board, travel, and research are typically taxable.

The US has tax treaties with numerous foreign countries. These treaties generally reduce the taxes of foreign residents on income they receive from US sources. The specific benefits of these treaties vary among countries and types of income. For example, under the Spain-US tax treaty, J-1 visa holders who are in the US as students or research grant recipients are exempt from taxes on scholarship or grant income, as long as they meet the treaty's other conditions. Similarly, international students from India on a student visa are likely exempt from taxes on grants, scholarships, or remuneration from employment. Additionally, Indian nationals who travel to the US for teaching or research at a university or college are tax-exempt on this income for the first two years of their stay. Canadian citizens in the US as international students are also exempt from tax on any US income received for activities related to education, training, or maintenance.

To determine eligibility for tax treaty benefits, international students can refer to IRS Publication 901 or the relevant tax treaty document. It is important to note that tax treaties do not typically reduce the taxes of US citizens or US treaty residents. However, US citizens and residents who receive income from a treaty country may be entitled to certain tax credits, deductions, or exemptions in that foreign country.

Taxable scholarships

In the United States, scholarships, fellowships, and grants are generally not subject to withholding when paid to U.S. citizens and resident aliens. However, they are subject to withholding when paid to nonresident aliens, including international students. The withholding tax rate is typically 30% but may be reduced to 14% (or a lower treaty rate) if the nonresident alien is a student, researcher, or grantee with a specific type of visa ("F", "J", "M", or "Q"). This reduced rate applies when the taxable amounts received are either incident to a qualified scholarship under section 117(a) or granted by organizations described in section 1441(b)(2).

International students with taxable scholarships, certain types of income, or income exempt under a tax treaty must file a U.S. income tax return, even if no tax is ultimately due. This includes reporting any income that is nontaxable under the Internal Revenue Code. Additionally, international students may be liable for Social Security, Medicare, and self-employment taxes.

To understand their specific situation, international students can refer to IRS publications such as "Withholding of Tax on Nonresident Aliens and Foreign Entities" (Publication 515), "U.S. Tax Guide for Aliens" (Publication 519), and "Tax Benefits for Education" (Publication 970). These publications provide detailed information on the tax rules and regulations applicable to nonresident aliens, including students and scholars.

It is important for international students to stay informed about their tax obligations and take advantage of any applicable tax benefits or exemptions. Consulting with a tax professional or specialist in international student taxes can also help ensure compliance with U.S. tax laws and avoid any potential penalties or issues.

Non-taxable scholarships

Scholarships, fellowship grants, and other grants can be tax-free for international students if certain conditions are met. The student must be a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and has a regularly enrolled body of students. The scholarship money must be used for tuition and enrollment/attendance fees, as well as for course-related books, supplies, and equipment.

In the United States, for instance, scholarships, fellowships, and grants that are not considered compensation for services are generally not subject to withholding when paid to U.S. citizens and resident aliens. However, they are subject to withholding when paid to nonresident aliens, including international students, at a rate of 30%. This withholding tax rate may be reduced to 14% or a lower treaty rate if the international student is temporarily present in the U.S. with a valid "F," "J," "M," or "Q" visa. Additionally, if the international student was a tax resident of a country with an income tax treaty with the U.S. before arriving, they may be eligible for tax exemptions or reduced rates under that treaty.

It is important to note that the tax rules and regulations for international students can be complex and may vary depending on the country and the specific circumstances of the student. International students should refer to the relevant government websites and official tax guidance for the country in which they are studying to understand their tax obligations and determine if their scholarship is taxable or non-taxable.

In addition to the previously mentioned conditions, there are specific programs and circumstances under which scholarships are non-taxable. For instance, in the U.S., any amounts received for services that are required by the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, or a comprehensive student work-learning-service program (as defined in the Higher Education Act of 1965) are not included in gross income.

Tax forms and processes

As an international student in the US, you may be required to file a tax return, even if you do not work during your studies. F-1 visa holders, for example, are required to file tax returns. This is mainly to ensure compliance and avoid any problems with the Internal Revenue Service (IRS).

There are several forms you may need to fill out as an international student in the US, depending on your circumstances. These include:

• Form 1040-NR: This is the form you will receive in the mail if you have received income from a US-based university, business, or individual. You will need to file this form with your taxes, detailing to the IRS how much you owe and how much you should be refunded or credited.
• Form 1042-S: If you are an international student on scholarship, you will receive this form from your university, and it must be filed with your taxes.
• Form W-7: If you need an Individual Taxpayer Identification Number (ITIN), or need to extend/renew your ITIN, you will need to fill out this form.
• Form W-4: If you are employed or interning through Optional Practical Training (OPT), you will likely need to fill out this form, which is the standard tax form for new employees in the US.
• Form W8-BEN: This form is for those who are subject to tax treaty benefits. It is typically given to your employer when you start your job, along with your W-4 or 1099.
• Form 8233: If you qualify for tax treaty benefits and plan to claim them, you will need this form. This form is for the exemption from withholding compensation for independent (and certain dependent) personal services of a non-resident alien individual.

It is important to note that the tax treatment of scholarships and stipends can vary depending on how they are used. Qualified expenses, such as tuition, fees, books, and equipment required for courses, are generally tax-free. On the other hand, non-qualified expenses, such as room and board, travel, and research, are typically taxable.

Additionally, tax treaties between the US and your home country may provide exemptions or reduced tax rates. For example, under the Spain-US tax treaty, J-1 visa holders are exempt from tax on scholarship/grant income and a certain amount of personal service income for a specified period. Therefore, it is essential to research the specific treaty between your home country and the US to understand the applicable exemptions or reduced tax rates.

Frequently asked questions