Savanna Hoffman
Nonresident students in the US may be subject to tax on grants or scholarships, depending on the source of the grant and the purpose of the grant. If the grant is from a foreign source and will be used for educational purposes outside the US, it may be exempt from US taxation. However, if the source of the grant is from within the US, withholding and/or reporting may be required. The tax rate for nonresident aliens is generally 30% but may be reduced to 14% if the nonresident alien is a student with an F, J, M, or Q visa. Students from countries with a tax treaty with the US that includes a scholarship or fellowship article may be eligible for a reduction or exemption from tax withholding.
| Characteristics | Values |
|---|---|
| Tax on scholarships, fellowships, and grants for non-residents | Subject to withholding tax |
| Tax rate | 30% |
| Reduced tax rate | 14% for students, researchers, or grantees with "F," "J," "M," or "Q" visas |
| Exemption | If the grant is from foreign sources, no withholding or reporting is required |
| Reporting | May be required if the source of income is from the United States |
| Form 1042-S | Used to report income, treaty benefits, and tax withheld |
| Qualified expenses | Tuition, fees, books, supplies, and equipment required for courses |
| Non-qualified expenses | Room and board, travel, non-required books, and personal computers |
| Tax treaty exemption | Available for residents of certain countries |
| W-4 forms | Cannot be used to claim exemptions by non-residents of California |
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What You'll Learn
Foreign students and nonresident aliens
Whether a scholarship or fellowship is subject to withholding depends on whether the recipient is a degree candidate or not, and what the grant will be used for. Degree candidates who receive payments for teaching, research, or other services are considered employees, and these payments are subject to Federal taxes and State tax withholdings. The IRS defines a degree candidate as an undergraduate or graduate student pursuing studies or conducting research to meet the requirements for an academic or professional degree.
If a nonresident alien receives a taxable scholarship or fellowship grant, they are required to file taxes. However, if their income comes only from specific sources, such as U.S. savings and loan institutions, U.S. credit unions, U.S. insurance companies, or investments that generate portfolio interest, they are not required to file taxes. Additionally, if they receive a scholarship or fellowship grant that is entirely tax-free, they are also not required to file taxes.
The withholding tax rate for nonresident aliens is generally 30%. However, if the nonresident alien is a student, researcher, or grantee with an "F," "J," "M," or "Q" visa, the tax rate may be reduced to 14% or a lower treaty rate. If the nonresident alien was a tax resident of a country with an income tax treaty with the United States before arriving in the U.S., they may be eligible for benefits under that treaty, such as tax exemptions.
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Tax treaties and exemptions
Generally, scholarship and fellowship payments made to nonresident aliens are subject to federal income tax withholding. However, there are specific tax treaties and exemptions that may apply in certain situations.
Tax Treaties
The United States has entered into tax treaties with various countries that include exemptions for scholarship and fellowship grants. For example, Article 20 of the U.S.-China Income Tax Treaty allows Chinese students temporarily present in the U.S. to be exempt from tax on their scholarship income, even if they become resident aliens. Similarly, residents of India may be eligible for benefits under the United States-India Income Tax Treaty. To claim a tax treaty exemption, the payee must be a nonresident alien student and a resident of a country with a tax treaty with the U.S. that includes an exemption for scholarship grants. The payee must notify the payor of their foreign status by filing Form W-8 BEN, W-8 BEN-E, or Form 8233.
Exemptions
There are specific exemptions to the federal income tax withholding requirement for scholarship and fellowship payments made to nonresident aliens. If the payments are for tuition, fees, and course-related expenses, they are not subject to withholding or reporting on Form 1042-S. Additionally, if the nonresident alien is temporarily present in the United States with an "F," "J," "M," or "Q" visa, the withholding tax rate may be reduced to 14% or a lower treaty rate. Furthermore, if the scholarship or fellowship grant is entirely tax-exempt, as described in Chapter 1 of Publication 970, Tax Benefits for Education, then filing is not required.
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Qualified vs. non-qualified expenses
For US citizens and resident aliens, scholarships, fellowships, and grants are generally not subject to withholding tax. However, for nonresident aliens, these are subject to withholding tax. The tax rate is typically 30%, but it may be reduced to 14% or a lower treaty rate if the nonresident alien is temporarily in the US with a student visa and meets certain conditions.
Now, let's discuss qualified vs. non-qualified expenses in the context of scholarships, fellowships, and grants:
Qualified Expenses:
Qualified education expenses refer to amounts paid for tuition, fees, and other related expenses required for enrollment or attendance at an eligible educational institution. These typically include fees, books, supplies, and equipment that are mandatory for the course. Qualified expenses are generally tax-free, and the income is not subject to tax withholding or reporting.
Non-Qualified Expenses:
Non-qualified expenses, on the other hand, are expenses that do not qualify for tax-free purposes. These are typically expenses above and beyond the cost of required tuition, fees, books, and mandatory supplies and equipment. Non-qualified expenses are considered taxable income and may be subject to withholding tax for nonresident aliens.
It's important to note that the distinction between qualified and non-qualified expenses is crucial in determining the tax implications of scholarships, fellowships, or grants. Nonresident aliens should carefully consider the nature of their expenses to ensure they comply with tax regulations. Additionally, specific forms, such as Form 1042-S and Form W-4, may be relevant for reporting and withholding tax on non-qualified scholarships, depending on the circumstances.
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Withholding tax rates
The withholding tax rate for scholarships, fellowships, and grants paid to nonresident aliens is generally 30%. However, there are certain conditions under which the withholding tax rate may be reduced to 14% or a lower treaty rate.
If a nonresident alien is a student, researcher, or grantee with an "F," "J," "M," or "Q" visa, and the taxable amounts received are incident to a qualified scholarship under Section 117(a) or granted by certain organizations described in Section 1441(b)(2), then the 14% rate may apply. This reduced rate also applies to incidental expenses for room and board, travel research, and other non-enrollment-related expenses.
Additionally, if a nonresident alien was a tax resident of a country with an income tax treaty with the United States before arriving in the US, they may be eligible for benefits under that treaty, such as an exemption from tax or a reduced rate. To claim these benefits, individuals must complete and submit specific forms, such as Form W-8BEN or Form 8233, depending on their circumstances.
It is important to note that scholarships and fellowship grants from foreign sources are generally not subject to withholding or reporting requirements. The withholding and reporting requirements primarily apply to grants from US sources.
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Tax forms and reporting
The tax forms and reporting requirements for nonresident US students receiving grants or scholarships can be complex and depend on various factors, including the source of the grant, the purpose of the grant, and the student's visa status. Here is a detailed breakdown of the tax forms and reporting considerations:
Withholding and Reporting Requirements
The first step is to determine the source of the grant, fellowship, or scholarship. If the funding is from foreign sources, no withholding or reporting is typically required for nonresident students. However, if the income is sourced from the United States, withholding and/or reporting may be necessary. The specific requirements depend on whether the nonresident student is a candidate for a degree and how the funds will be used.
Degree Candidates and Non-Degree Candidates
Degree candidates, defined as undergraduate or graduate students pursuing studies or research to meet academic requirements, may receive payments that are subject to different tax treatments. If the payments are compensation for teaching, research, or other services, they are generally considered employees, and these payments are subject to federal and state tax withholdings. On the other hand, scholarship or fellowship grants that are exclusively for tuition, fees, and course-related expenses (such as books and equipment) are typically not subject to federal income tax withholding and are not reportable on Form 1042-S.
Incidental Expenses
It's important to distinguish between incidental expenses and those required for enrollment. Incidental expenses like room and board, travel, and other non-essential costs are subject to reporting on Form 1042-S. These expenses may also be subject to federal income tax withholding, typically at a rate of 14% for students with F, J, M, or Q visas. For other nonresident aliens, the withholding rate may be higher, typically around 30%.
Tax Treaty Considerations
It's worth noting that if the nonresident student was a tax resident of a country with an income tax treaty with the United States before arriving, they may be eligible for benefits under that treaty. This could include exemptions from tax or reduced withholding tax rates. The specific tax treaty between the two countries should be consulted for detailed information on the applicable benefits.
Form 1040NREZ or 1040NR
Nonresident alien students may need to file federal tax forms such as 1040NREZ or 1040NR, depending on their individual tax circumstances and the length of their stay in the United States. Additionally, those in F or J status, regardless of income, are typically required to file Form 8843 for informational purposes.
University-Specific Procedures
Some universities, like the University of California, Riverside, do not use the "alternate withholding procedure" for scholarships and fellowship grants. As a result, nonresident aliens cannot claim exemptions on Form W-4. However, this may vary across different educational institutions, and it is essential to refer to the specific guidelines provided by the university in question.
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Frequently asked questions
Nonresident US students are generally subject to a 30% withholding tax rate on scholarships, fellowships, and grants. However, if the nonresident alien student is temporarily present in the US with an "F," "J," "M," or "Q" visa, the withholding tax rate may be reduced to 14%.
Scholarships, fellowships, and grants are considered taxable income when they are used for expenses other than qualified expenses. Qualified expenses include tuition, fees, and course-related expenses such as books, supplies, and equipment required for courses.
Students or scholars from countries with a tax treaty with the US that includes a scholarship/fellowship article may claim exemption or reduction of tax withholding. The student must complete the required forms, and the university will report stipend payments and any federal tax withheld on Form 1042-S.
The source of the scholarship or grant is determined by the "residence of the payor" rather than the location of the educational activity. For example, if a foreign student's government contracts with a US university to administer scholarship funds, the payment is considered a foreign source.
