International Students - Grant and Scholarship Payments

decorative-icon International Students - Grant and Scholarship Payments

 

Background

In 1986 the Tax Reform Act substantially overhauled the Internal Revenue Code (IRC) and included a significant change to IRC §117 special tax benefit for students, a provision that governs the taxation of scholarship/fellowship grants, so that only tuition and directly related expenses were eligible for a tax exclusion. Shortly after, IRS ruled in notice 87-31 that a grant-making institution was not required either to withhold tax or to report to the IRS any scholarship/fellowship payments, taxable or not to the student, that were made to U.S. citizens and permanent resident aliens. However, the ruling did not apply to institutions that made payments to international (non-resident aliens) students. So, payments of scholarships or fellowships made to international students are subject to U.S. tax reporting and withholding, unless there are treaty benefits available and formally claimed.

Payments of scholarships, fellowships, and grants paid to students who are U.S. citizens, resident aliens, and non-resident aliens who have met the substantial presence test (RAfTP) are not reportable by the University to the IRS and are not subject to tax withholding.  However, these students will need to make the determination themselves whether the scholarships should be reported on their personal tax returns.  See IRS Publication 970  https://www.irs.gov/pub/irs-pdf/p970.pdf

 

Terminology & Tax Withholding

Scholarship/Fellowship: cannot require any past, present, or future services.

Scholarship/Fellowship Source: For scholarship/fellowship payments the "residence of the payer" determines the source of payment. If the payment is from an U.S. entity it would be considered to be U.S. source and subject to U.S. tax regulations including tax reporting and tax withholding unless scholarship/fellowship treaty benefits are available and formally claimed.  If the payment is from an entity outside the U.S. it would go directly into the student’s account and would be "foreign source", and if paid to an international student, would not be subject to U.S. taxation.

Qualified Scholarship/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/Fellowship payment: Payments for living expenses such as room and board or travel that only benefits the student’s education, and any amounts paid directly to the international student regardless of amounts due for tuition or fees.

Substantial Presence Test (SPT): IRS test for special status of an international visitor for tax purposes only. Once an international visitor is inside the U.S. for a specifically counted number of days over the course of three years, they may become a “Resident Alien for Tax Purposes” (RAfTP).  However, individuals who are in the U.S. under an F-1 or J-1 visa status are exempt from counting days for some years. The University of Oregon uses a UONRA form to determine if the international student meets the SPT.  If the SPT is met, then the RAfTP is treated the same as a U.S. person for tax purposes.  https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test

Tax Withholding:  Any and all amounts of taxes withheld from a payment will be paid to the IRS in the name of the recipient of the payment.  After the end of the current calendar year, before March 15th of the following calendar year, the recipient will receive a 1042-s form from the University of Oregon showing the payment and withholding amounts. The recipient may use the information on the 1042-s form to fill out a U.S. tax return and request a possible refund from the IRS.

Qualified 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. These non-taxable amounts are called qualified education expenses.

Non-Qualified Expenses: Amounts in excess of qualified education expenses are taxable to the student unless scholarship/fellowship treaty benefits are available and formally claimed.  The IRS defines non-qualified education expenses to include student activity fees, athletic fees, insurance expenses, certain travel, room and board, health insurance, living allowance stipends, or other expenses not directly related to an individual’s academic course of instruction.

Treaty Benefits:  The U.S. does not have a tax treaty with every country in the world. There are only 41 countries that have a scholarship/fellowship treaty benefit article. If there is a scholarship/fellowship article, this type of treaty benefit can only be claimed if the international visitor has a U.S. taxpayer ID number or a Social Security Number, using either an IRS W-8BEN or an 8233 form.  Here is a list of countries that have a tax treaty scholarship/fellowship article https://apps.irs.gov/app/vita/content/globalmedia/treaty_benefits_incomecode15.pdf .

The IRS requires 14% tax withholding on non-qualified scholarships paid to an international visitor, unless scholarship/fellowship treaty benefits are available and formally claimed.

Process Flow

Student Accounts Receivable (A/R) Payments:

The net amount of any U.S. source scholarship/fellowship payments that exceed the amount of qualified expenses, within a calendar year, are subject to 14% tax withholding, unless scholarship treaty benefits are available and formally claimed.

Accounts Payable (A/P) Payments:

  1. Determine if the student might be eligible for tax treaty benefits. Look to see if their country of residence for tax purposes on the list of countries that have negotiated scholarship/fellowship tax treaty benefits with the United States.  https://apps.irs.gov/app/vita/content/globalmedia/treaty_benefits_incomecode15.pdf .
  1. Ask the student has a U.S. Taxpayer ID number (ITIN), issued by the IRS, or a Social Security Number (SSN).
  1. If they do not have a U.S. Taxpayer ID number (SSN or ITIN), they may leave line 5 blank.

 

  1. Have the student complete a UO-NRA form . This will be submitted to Business Affairs Office (jgermack@uoregon.edu) and analyzed to determine whether they have passed the Substantial Presence Test (SPT).
  1. Have the student fill out and sign a W8-BEN form, even if they meet the SPT. Note: Line 3 is for their permanent address outside the U.S., and Line 4 is for their current U.S. address. Their Date of Birth is required.
  1. If they are from a treaty country (step 1) ‘And’ they have an ITIN or SSN (step 2); they are eligible for Treaty Benefits.
  1. If they are not eligible for Treaty Benefits, they do not need to fill out Part II Claim of Tax Treaty Benefits. Go to Step 9.
  1. If they are eligible for treaty benefits, they will need to complete Part II of the W-8BEN form to formally claim treaty benefits.  Part II should include the name of their country of residence, the treaty article found at https://apps.irs.gov/app/vita/content/globalmedia/treaty_benefits_incomecode15.pdf  , 0%, Scholarship/Fellowship, and a statement, if it is true, that they have no permanent residence inside the U.S.
  1. Using the forms, follow Accounts Payable Vendor Set Up Procedures found at https://ba.uoregon.edu/content/vendor-setup

 

Applying for an SSN or ITIN

If your student will be an employee of the University of Oregon, they may apply for a social security number (SSN).  Only employees are eligible to obtain an SSN.

For SSN:

Social Security Administration
2504 Oakmont Way
Eugene, OR 97401-5441
Office hours: 9:00 a.m-4:30 p.m.

Documentation required:  their passport, their DS-2019 or I-20 form, a letter from the University of Oregon that verifies that the student is a current fulltime student, are authorized to work, and will be working on campus.  The Office of International Affairs Global Engagement https://international.uoregon.edu/ may be able to provide the students with 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  call for an appointment

Documentation required:  their passport, their I-94, a second photo, their DS-2019 or I-20 form, a letter from the University of Oregon that verifies that the student is a current fulltime student and will be receiving non-Payroll stipends such as scholarships or fellowships.  See the W-7 application instructions at https://www.irs.gov/forms-pubs/about-form-w-7 . The Office of International Affairs Global Engagement https://international.uoregon.edu/ may be able to provide the students with the letter upon request.

 

1042-S Tax Form Frequently Asked Questions

*What is a 1042-S form and when will I receive it in the mail?

  --The IRS form 1042-S is used to report amounts paid to and taxes withheld from foreign persons (including persons presumed to be foreign) that are subject to income tax reporting, even if no amount is deducted and withheld from the payment due to a treaty or exception to taxation. The Forms 1042-S must be sent to both the IRS and the recipients by March 15 of the year following the calendar year in which the income subject to reporting was paid. If March 15 falls on a Saturday, Sunday, or legal holiday, the due date is the next business day. The University will make every effort to have these forms in the mail sooner than the due date.  The forms will be mailed to the most recent mailing address in Banner.  https://www.irs.gov/forms-pubs/about-form-1042-s

*Why did I receive an IRS Form 1042-S?

   --The University is required by IRS rules and regulations to report on a Form 1042-S certain payments made to nonresident aliens, see IRS Publication 515  https://www.irs.gov/pub/irs-pdf/p515.pdf.  Additionally, the University may be required to withhold taxes on such payments.  The payment made to you was determined to be a reportable payment, with any withheld taxes also being reported, and thus you were sent a Form 1042-S.

  *Is the IRS notified of the payment that I received from the University?

   --Yes, if you received a Form 1042-S, then the payment was also reported to the IRS.

  *What am I supposed to do with the Form 1042-S?

   --Use the information contained on the Form 1042-S to prepare your U.S. tax return if you determine you are required to file a return.

 

 

Forms