Grant and Scholarship Payments to International Students

Grant and Scholarship Payments to International Students

 

Background

In 1986 the Tax Reform Act substantially overhauled the Internal Revenue Code and included a significant change to section 117 the provision that governs the taxation of scholarship/fellowship grants. Congress amended section 117 so that only tuition and directly related expenses were eligible for the 117 exclusion. The change Congress made to 117 was directed at scholarship/fellowship recipients who were U.S. citizens and permanent resident aliens. Shortly after the Tax Reform Act the IRS ruled in IRS notice 87-31 that a grant-making institution was not required either to withhold tax or to report scholarship/fellowship payments made to U.S. Citizens. However the ruling did not apply to institutions that made payments to foreign (non-resident aliens) grantees.

Scholarship/Fellowship Source: For scholarship/fellowship payments the "residence of the payor" determines the source of payment. If the payment is from an entity outside the U.S. it would be "foreign source", and if the payment is from an U.S. entity it would be considered to be U.S. source. Candidate for a degree: A student who is pursuing a degree at a college or university, or attends a primary or secondary school, or attends an accredited educational institution. Qualified scholarship or fellowship payment: A payment that is used for tuition, mandatory fees, books, or education costs that are required of all students in a course of instruction, is excludable from taxable income under IRS code 117.

Non-Qualified scholarship or fellowship payment: Payments for travel, room and board, or an amount received that any portion received represents payment for teaching, research, or other services be provided by the student as a condition for receiving. Substantial Presence: Status an individual will receive for tax purposes only. Computed on the days of presence in the U.S. during the current calendar year, 1/3 of days the 1st preceding year, and 1/6 of the days of presence for the 2nd preceding year. Before applying the calculation you must exclude exempt-individual "calendar" years, which are 5 years for a student, or 2 years for a teacher, trainee or researcher. If an individual is in the U.S. as an exempt individual for any part of a calendar year, that year will be counted as a full calendar year when determining exempt-individual years.

Terminology

Scholarship/Fellowship Source:

For scholarship/fellowship payments, look to the "residence of the payor" to determines the source of payment. If the payment is from an entity outside the U.S. it would be "foreign source" and not subject to U.S. taxation.  If the payment is from an U.S. entity, it would be considered to be U.S. source.

Candidate for a degree:

A student who is pursuing a degree at a college or university, or attends a primary or secondary school, or attends an accredited educational institution.

Qualified scholarship or fellowship payment:

A payment that is used for tuition, mandatory fees, books, or education costs that are required of all students in a course of instruction, is excludable from taxable income under IRS code 117.

Non-Qualified scholarship or fellowship payment:

Scholarship or Fellowship payment for travel, room and board, or an amount received that any portion received represents payment for teaching, research, or other services be provided by the student as a condition for receiving.

Expenses:

Scholarships/fellowships are not taxable to the extent they do not exceed the cost of tuition and course-required expenses such as fees, books, supplies, equipment required for classes; as long as the student is a candidate for a degree. These non-taxable amounts are called qualified education expenses. Amounts in excess of qualified education expenses are taxable to the student unless Treaty Benefits are available and formally claimed.  The IRS defines non-qualified education expenses include student activity fees, athletic fees, insurance expenses, travel, room and board, living allowances, or other expenses unrelated to an individual’s academic course of instruction. The IRS requires 14% tax withholding on non-qualified scholarships when the student is an international visitor.

 

Substantial Presence:

Status an individual will receive for tax purposes only. Computed on the days of presence in the U.S. during the current calendar year, 1/3 of days the 1st preceding year, and 1/6 of the days of presence for the 2nd preceding year. Before applying the calculation you must exclude exempt-individual "calendar" years, which are 5 years for a student, or 2 years for a teacher, trainee or researcher. If an individual is in the U.S. as an exempt individual for any part of a calendar year, that year will be counted as a full calendar year when determining exempt-individual years.

Process Flow

A/R Student Aid Payments:

If the payment exceeds the amount that would be a qualified payment, the same process that is used to determine the taxable portion of a non-qualified payment paid through A/P will be followed.

A/P payments:

  1. Payments of scholarships, fellowships, and grants paid to U.S. citizens, resident aliens, and non-resident aliens who have met the substantial presence test are not generally reportable by the University to the IRS and are not generally subject to withholding of tax. However, payments of taxable scholarships, fellowships, and grants to nonresident aliens are generally reportable to the IRS and are generally subject to withholding of U.S. Federal income tax of 14% unless they are qualified scholarship or fellowship payment: A payment that is used for tuition, mandatory fees, books, or education costs that are required of all students in a course of instruction, is excludable from taxable income under IRS code 117.

  2. The student will need to complete a UO-NRA form that will be used to determine whether they have passed the substantial presence test. If they meet the test they will be treated the same as an U.S. citizen, and the University has no reporting or withholding obligation on the payment. If not go to step 2.

  3. Determine if the student is eligible for tax treaty benefits. Is their country of residence for tax purposes on the list of countries that have negotiated tax treaties with the United States. If they are not eligible for treaty benefits go to step5.

  4. If they are eligible for treaty benefits they will need to complete a W8-BEN form to claim treaty benefits. A U.S. reporting ID number is required on the W8-BEN form, if the student doesn't have a number see step 4 below. Once the W8-BEN is complete the payment is nontaxable to the student.

  5. Your student will need to apply for a social security number (SSN), or a individual taxpayer identification number (ITIN). If they plan on working in the future they should apply for a SSN.

    For SSN:

    Social Security Administration
    2504 Oakmont Way
    Eugene, OR 97401-5441
    Office hours: 9:00 a.m-4:30 p.m. Make sure they take their passport and IAP-66.

    Documentation required:

    A letter from the University that verifies that the student is a current fulltime student, and that they are authorized too work and will be working on campus.
    The Office of International Programs will provide the students the letter upon request.

    For ITIN:

    Internal Revenue Service
    211 E. 7th
    Eugene, OR 97401
    Office hours: 8:30 a.m.-4:30 p.m.
    (541) 302-0999


    Documentation required:

    W-7
    Passport with I-94 card
    And second photo ID (see W-7 instructions)

  6. The final opportunity to reduce the taxable portion of the scholarship payment is to use the personal exemption for scholarship purposes. Is the student or researcher an employee of the University? If so, they are probably using the exemption amount for payroll and we dont want to allow them to claim it twice and incur a large tax liability at yearend.

1042-S Tax Form:

In Februrary or March following the end of the calendar year in which a tax reportable payment was made, the student will receive an IRS 1042-s form. The form will show the student's name, address, gross amount of tax reportable scholarship award, and the amount of any tax withheld.  The student may use the information on this form when filling out their U.S. tax return to request a possible refund.

 


 

Forms