Understanding whether your scholarships and stipends are taxed is crucial for compliance and to avoid potential penalties.
Ensuring compliance with US tax laws is the best way to avoid problems with the IRS (Internal Revenue Service) down the line.
So, in this blog post, we’ll break down the key aspects of taxation on scholarships and stipends for international students and J-1 visa holders!
Do you have to pay taxes on scholarships?
Yes, international students may have to pay taxes on scholarships and grants they receive.
The scholarship tax depends on several factors, including how the scholarship is used:
- Qualified expenses: These are generally tax-free if they cover tuition, fees, books, supplies, and equipment required for courses.
- Non-qualified expenses: Amounts used for room and board, travel, research, or other expenses are typically taxable.
The same rules apply to J-1 holders.
However, tax treaties between the US and your home country may provide exemptions or lower tax rates. It’s essential to check if such treaties apply to you.
What are qualified educational expenses?
There are various expenses that will come under this definition.
They are usually defined as the costs of most course-related expenses, including fees, books, supplies, and equipment required for the course.
Another factor you should remember is that they can’t be optional expenses you elect to pay for that aren’t relevant to your particular course or institution.
What are non-qualified expenses?
There are plenty of examples of expenses that do not qualify.
The following are not qualified education expenses:
- Room and board
- Insurance
- Medical expenses (including student health fees)
- Transportation
- Similar personal, living or family expenses.
Is room and board taxable?
Perhaps the interesting aspect of what counts as a ‘qualified’ expense is whether any of a scholarship that is used for room and board will generally be taxable.
The answer, in general, is yes, it is taxable.
If you were to use, for example, $6,000 for room and board out of a $15,000 scholarship, it would be considered taxable income and therefore it would have to be reported on a federal income tax return (1040NR).
This can often draw confusion as international students assume this is a necessity for their educational program.
What happens if you don’t report a scholarship on your tax report?
Failing to report taxable scholarships on your tax return can lead to several consequences:
- Penalties and Interest: The IRS may impose penalties and interest on the unpaid tax.
- Loss of Future Financial Aid: Not reporting can affect your eligibility for future scholarships and financial aid.
- Legal Issues: Non-compliance may lead to legal action and affect your visa status, as well as future visa and Green Card applications.
Therefore, it’s crucial to accurately report all taxable scholarships and grants!
Sprintax Returns will help you prepare a compliant nonresident tax return with the IRS, ensuring peace of mind which can be hard to come by.
Is a stipend considered a salary and is a stipend taxable?
A stipend is generally considered taxable income, but it is not treated the same as a salary.
Stipends are typically provided to cover living expenses for interns, researchers, or trainees, and are subject to income tax.
Stipends are not usually subject to Social Security and Medicare taxes. However, they must be reported on your tax return.
How to report a scholarship on tax returns
To report a scholarship on your tax return, follow these steps:
1. Gather Documentation
Collect all forms and documents related to your scholarship, Form 1042-S (Foreign Person’s US Source Income Subject to Withholding).
2. Determine Taxable Amount
Separate any relevant qualified and non-qualified expenses.
3. Use the Correct Forms
Report the taxable portion of your scholarship on Form 1040 or 1040-NR. If you received a Form W-2 for part of the scholarship, include that information as well.
You can prepare and e-file form 1040-NR with Sprintax Returns.
How much is a stipend taxed in 2024?
The stipend tax rate depends on your total income and filing status, as well as any potential tax treaties.
The usual withholding tax rate is 30%.
However, the tax rate may be reduced to 14% (or a lower treaty rate) if you are a nonresident alien student, researcher, or grantee who is in the US on an F, J, M, or Q visa, and what you received was either:
- Incident to a qualified scholarship
- Granted by certain types of organizations.
You can find out more about tax treaties on this blog post.
Can a tax treaty help me pay less tax on scholarships?
That depends!
Some tax treaties will exempt you from paying a certain amount of tax, and it will vary from country to country.
For example, under the Spain and US tax treaty, J-1 visa holders who are in the US as students, research grant recipients, or trainees are exempt from tax on scholarship/grant income (if they meet all other conditions of the tax treaty) and up to $5,000 personal service income for a period of five years for students and two years for other individuals.
Again, this will vary depending on the country so you should research the terms of the treaty between your home country and the US.
Note: this tax exemption does not apply to income from research which is not conducted in the public interest.
Who can help me with my taxes?
That’s where Sprintax comes in!
We offer specialized services that allow nonresidents to file accurately and efficiently!
Sprintax Returns will ensure you are fully tax compliant when tax season rolls around, preparing all of your tax paperwork correctly and in one place.
As well as this, Sprintax Forms will assist you filling out pre-employment forms in the US.
As a nonresident, getting to grips with these topics can be difficult, but a basic understanding will go a long way come tax season!
Why not check out what Sprintax can offer you today?
