Scholarship or fellowship payments can be compensatory (a payment for services) or non-compensatory (a payment that does not require any services to be performed). Depending on certain factors, they can be taxable, non-taxable, or partially taxable. The determination of taxability hinges upon several factors, some of which include the following: 1) what the scholarship or fellowship is paying for, 2) whether it represents payment for services performed by the individual as an employee, and 3) whether the services were required as a condition for receiving the scholarship or fellowship. The services do not need to be provided in the tax year in which the scholarship or fellowship payment is received in order for those services to affect the taxability. This rule applies to U.S. citizens and residents as well as nonresident aliens.
Here is an example: A nonresident alien student was granted a fellowship to attend graduate studies at a U.S. university. The terms of his fellowship stipulated that the student would not have to pay tuition or fees, and he would receive payments to cover course-related expenses and living costs. As a condition of the fellowship, the student was required to work in a lab doing research for 250 hours each year. The student first arrived in the United States in 2013 on a J-1 visa.
In 2013, the student filed Form 8843 to claim the exemption from the substantial presence rules, which might otherwise cause him to be classified as a U.S. resident for U.S. tax purposes. He also filed Form 1040NR, on which he reported the portion of his fellowship allocated to the research work he was doing (i.e. services he was performing) and the housing allowance (not considered a qualified education expense). Because he worked with an experienced tax professional, he was able to comply with regulations and avoid costly penalties.
Our International Tax Group can help you with your foreign tax questions. If you have questions about taxes in a foreign country, our network of worldwide accounting firms is available to assist.
We hope you have enjoyed this blog series on issues faced by international students, scholars, and professors. If you would like to learn more about how we can help you navigate the U.S. and foreign tax landscape, please reach out to us at info@swcllp.com or call us at 607-272-5550.